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"Oh, you're meeting with Jeremy Siegel tomorrow? Lucky you," a professor at the University of Pennsylvania's Wharton School told me. "You'll leave feeling much better about your investments than when you entered," he said with a laugh and a hint of sarcasm.

This is the Jeremy Siegel -- Wharton's famed finance professor -- the public has come to know: A perennially bullish academic who was born an optimist and never looked back, leading to criticism that he's more stock market cheerleader than rational analyst.

But after meeting with Siegel at a conference at Wharton in Philadelphia this week, I left with a different view. He is perhaps as bullish on the stock market as he's ever been. "The pessimism these days is just striking," he notes. And some of his arguments are still as controversial, if not logically curious, as ever. But agree with him or not, Jeremy Siegel's view on the stock market is fascinating. There's a reason people still pay attention to him.

Siegel is quick to note that being characterized as a permabull is undeserved. "People ask me, 'Jeremy, why are you always so bullish?' Well, I'm not. I wasn't bullish on stocks in 2000," he says. And he's right: In March 2000, Siegel penned an op-ed in The Wall Street Journal warning that technology stocks were grossly overvalued.

But it's his book, Stocks for the Long Run, that people remember. First published in 1994 and now in its fourth edition, the book has sold hundreds of thousands of copies. Its message is clear: Over time, stocks outperform all other assets classes. They are, definitively, the greatest wealth-generating machine that investors can get their hands on. Hitting the shelves just as one of the largest bull markets in history was heating up, the book served as a bible during the 1990s for investors anchored to the idea that stocks could go only one way -- up. After stocks crashed and then languished for the past decade, Siegel has been the butt of all kinds of criticism. As markets bottomed in early 2009, Business Insider wrote, "No, the charming Wharton professor isn't dead. But he may just have killed what's left of his reputation." It continued: Siegel "has been very bullish, and very wrong, for the past two years."

But perpetual bullishness isn't what Siegel preaches. Most of those criticizing his bullishness ignore the title of his book. He isn't just bullish on stocks; he's bullish on stocks in the long run. I'd even qualify that: Siegel is bullish on stocks in the long, long run.

A group of financial writers had been at Wharton for four days, listening to lectures on behavioral finance, outsourcing, and accounting fraud. Siegel's presentation had a feel different from all others. He isn't just a professor presenting his research. He's a seasoned (he's been a professor for 40 years) financial philosopher meets historian meets talented showman. The last part is perhaps Siegel's most underappreciated strength. The man is far more charismatic than you might think. When presenting otherwise dry data on historic investment returns, Siegel drops his voice to a whisper and then booms into a punch line for dramatic effect.

It's that data that underscores Siegel's view of the market. In the late 1980s, then a monetary policy economist, he began collecting historic returns on stocks, bonds, cash, and gold going back to 1802. It's the most complete set of historic investment returns available, he points out.                                                             

What the data show is crystal clear. One dollar invested in stocks in 1802 would be worth more than $700,000 today, adjusted for inflation. The same dollar in bonds would be worth less than $1,500. In gold, it's about $4. In a dollar kept under your mattress, it's $0.05. Over two centuries, there is no substitute to stocks.

Which would be an open-and-shut finding if we were Methuselah, and had 200 years to save. Unfortunately, we don't. And within that 200 years of data sits an uncountable number of chaotic swings, with stocks moving from wild bull markets to crushing bear markets -- even a 90% collapse during the Great Depression. Over some periods, stocks dramatically underperform bonds, gold, and cash. That holds true for the past 10 years, as investors know all too well.

But it's at this point -- the point where so many become skeptical of Siegel -- where his work becomes the most persuasive. Comparing risk between stocks and bonds, the opposite of what most assume is true emerges when measured over long periods of time.

Modern finance theory holds that stocks should return more than bonds because they're riskier. What Siegel's data show, however, is that this risk diminishes, even flips upside down, when you hold an asset long enough. Since 1802, average stock volatility is much higher than for bonds when looking at one-, two-, or five-year periods. But then it flips. When held for 10 years, average real stock returns become less risky than bonds. Over 20-year and 30-year periods, there's no comparison: The upside potential is far greater for stocks, and even the worst periods generate positive real returns, while the worst period for bonds leaves investors with substantial real losses. "Even when looking at periods that ended in the bottom of the Great Depression, stocks had a positive real return if held for 20 years," Siegel said. "You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds. So which is the riskier asset?" he asks, his voice now booming. "And nothing that's happened over the past 10 years negates this data." Nor are these unreasonable periods of time. Twenty or 30 years is about the average time between when people start saving and when they retire.

This is where those criticizing Jeremy Siegel often get it wrong. The key to understanding his analysis is that he's only concerned with long, long periods of time. Asked about stocks' recent lost decade, he notes that average annual returns since 1991 have actually been quite good. Ten-year periods aren't of much interest to him. They're too short.

"Stocks go back and forth, back and forth," he says. "The past decade has been frustrating. But that's only because we had unreasonably high returns in the 1990s. The last 10 years has just offset the previous decade."

Siegel is especially bullish on stocks today because he thinks valuations are extraordinarily low. Stocks now trade at a price-to-earnings ratio of 11.5, compared with a historic average of closer to 19 when interest rates are this low. Analysts expect the S&P 500 to earn $112 next year, putting stocks at just over 10 times forward earnings.

Now, most investors think the $112 figure is far too high, and will come down -- a reason many use to justify being bearish on stocks. Siegel actually agrees. "I don't believe the number. I think it will come down," he says. But that's fine. Even if earnings fall 25% from current levels, stocks would still sell at a P/E ratio close to their long-term average. If earnings stay at current levels forever, stocks would still be a great buy, Siegel says. "You don't need growth to justify these numbers," he says. "And if we actually earn $112 next year? Oh, god. It's a bonus. You'll see stocks up 30% or 40%."

The amount of pessimism in today's market is totally overdone, he says. "It's one of the most bearish forecasts I've ever seen." Bond giant PIMCO has a gloomy theory called the "new normal," which forecasts real economic growth of 1%-2% going forward, compared with 3%-4% in the past. At the same time, gauges of economic growth expectations, such as the yield on Treasury inflation-protected securities, or TIPS, are now near zero percent. The market panic of the past few months has made even bearish analysts like PIMCO look cheery. "It's the ultimate sign of pessimism," he says.

What keeps Siegel bullish on the long term is a belief that what drives our economy over time is still alive and well. In the short run, economists focus on demand as the key economic driver. In the long run, the real fuel is productivity, or output per hour worked, and population growth. This is one of the least controversial theories in economics, but it, too, is prone to criticism when viewed over different time periods. Most economists are bearish on the economy right now because demand is low as consumers deleverage. Siegel agrees, but remains bullish on the long run for a simple reason: Productivity is not only increasing, but it's increasing at an accelerating rate as technology connects the world. When ideas build on top of other ideas, prosperity multiplies. "We've brought 2 or 3 billion people online sharing ideas," Siegel says. The impact that this has is astounding. People used to work full time just to feed and shelter themselves, he notes. Today, the average person in the developed world needs to work just an hour a day to support basic human needs. Productivity has dramatically increased the quality of life around the world, and there's little sign of it slowing down -- in the long run.

Still, there are legitimate critiques of Siegel's views that remain open to debate. Yale economist Robert Shiller -- a good friend and former classmate of Siegel's -- values stocks based on an average of the past 10 years' earnings, adjusted for inflation. He calls it the cyclically adjusted price-earnings ratio, or CAPE. Based on CAPE, stocks are currently fairly valued at best, if not overvalued.

Asked to defend his analysis against CAPE, Siegel's views turn fuzzy. "CAPE shows valuations to be quite high, but the source is purely the earnings collapse of 2008-2009, when financials had these enormous write-offs," that aren't indicative of corporate America's earnings power, he says. When I point out that Shiller and others (including our own Alex Dumortier) have shown that this isn't so clear -- even ignoring the earnings collapse of 2008-2009, CAPE doesn't move significantly, which is the point of using a 10-year average -- Siegel doesn't come up with much of a response, noting that the losses were spread out over several quarters.

He is equally incredulous of the idea that corporate profits are at a cyclical top as profit margins approach record highs. "Those profit margins are up because foreign sales make up a larger percentage of companies' business. And guess what? Foreign business generates higher profit margins because they have lower tax rates," he says, although foreign sales as a percentage of total S&P sales have actually declined since 2008. "Some say we're at the top of this boom. I just don't understand that. Have you looked around? What boom are they talking about? The recession just ended two years ago. Unemployment is still high. How can cyclically adjusted profits be at a cyclical high?"

He then says something that catches my attention: "Forget the numbers. Go back to the logic of it all," he says. This was an interesting turn. The same Siegel who an hour earlier asked us to ignore our feelings about stocks and look at the data was now asking us to ignore the data and look at our feelings.

It is moments like this, I believe, that cause Siegel to face criticism. His work is valuable, persuasive, and intriguing. But it's very specific to the long run. Those critical of his work often ignore this, and it appears Siegel may forget it at times, too. The truth is, short-term profit peaks or 10-year earnings multiples aren't that relevant to his findings. Almost any critique thrown at Siegel can be properly defended with the words, "That shouldn't matter to investors with a long-term time horizon." Ironically, the beauty of Siegel's work is the idea that the short-term market fluctuations his critics obsess over set the stage for the long-term returns he emphasizes. "Fluctuations unnerve investors," he says. "Why? Because people can't stand them in the short run. Volatility scares enough people out of the market to generate superior returns for those who stay in." In that sense, those critical of Siegel's work are often actively proving its validity.

What might change Siegel's mind? Another uncontrolled collapse of the financial system, similar to what happened in 2008, could set the global economy back in a big way.

Will that happen, someone asks?

"Stay tuned," he says.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (26) | Recommend This Article (87)

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  • Report this Comment On October 14, 2011, at 6:48 PM, WyattJunker wrote:

    Business Insider is an embarrassment. They are a perennial populist pessimist and cater to Zerohedge doomers.

    And I can't stand sites that rely on click thru shenanigans to prop up their asking ad rates. Its a cheesey thing to do to readers and feels transparently desperate.

    Sometimes they're interesting however, in an end times, cataclysmic armageddonist way.

  • Report this Comment On October 14, 2011, at 6:53 PM, jm7700229 wrote:

    Siegel's data can be a bit misleading. A dollar invested in a buggy whip manufacturer in 1902 would be worth zero today. But his point is valid from a macro standpoint. And "the market" isn't exactly what we invest in, either. In 1998, I had about 2/3 of my portfolio invested in mutual funds, good ones all, and a third in stocks, mostly fast growing tech stuff. I saw the absurd valuations building and, as they made me more and more nervous, I slowly got out of almost all my individual holdings. Trusting the mutual funds to be managed by people who are smarter than me, I left them alone. I came out of the crash with a lot of cash and heavily devalued mutual funds, but year end 2002 had saw my portfolio worth about 20% more than year end 1999. Similarly, the crash in the financial market was predictable, and predicted, even by a tyro like me. Again, I ended 2010 worth considerably more than year end 2007.

    If one follows the Buffetism to be afraid when the market is being greedy and cash out during the inflating of the bubble, one can even beat Siegel's projections. I'm a fan (even though my horizon now is MUCH shorter than 20 years).

  • Report this Comment On October 14, 2011, at 9:06 PM, jerryz11 wrote:

    As value investors, why should we care about Prof. Siegel's argument or those of his critics? Those are nothing more than academic gibberish. All we need to do is try and find undervalued securities, be it stocks of XYZ or bonds of ABC. It doesn't make one iota of difference whether stocks outperform bonds over 20, 50, or 1000 year periods, nor does it matter whether the stock market overall is over- or undervalued. It all comes down to whether a given security can be purchased for significantly less than its intrinsic business value. I wish the Wharton professors or those of other elite schools for that matter would be willing to spend some time reading The Intelligent Investor, and then they would know what they are talking about.

  • Report this Comment On October 14, 2011, at 11:32 PM, PeakOilBill wrote:

    A few of the longest I can think of, IBM, AT&T, Coke, Verizon, P&G, Consolidated Edison, Exxon, Chevron, Peabody, JNJ, Kraft, BHP, Rio Tinto, Freeport McMoRan , Microsoft, and WalMart. They could all be around in 2050. Big food, big minerals, big energy and IBM will always be needed.

    If you just want to buy some stocks and forget about them while you cash nice dividend checks, divide your money equally among Total, Chevron, Shell, Conoco, Exxon and BP. After 2020, peak oil will make you a rich man. Sell them before the government is forced to nationalize the oil industry and ration gasoline. They will ration because to just let rich people drive around will be too socially destabilizing.(Unless peak oil causes a repressive dictatorship to come to power, which is possible due to the economic chaos it will probably cause.) But you will make a LOT of money before that happens. And if inflation takes off, you will be as protected as possible. Oil is the most useful thing ever found. We consume 2&2/3 cubic miles each year. And the supply is finite.

  • Report this Comment On October 14, 2011, at 11:40 PM, TheDumbMoney wrote:

    PeakOilBill, wow the first part of your post was awesome, and then it turned into a whole pile of crazy, and then you made a good point at the end. My head is spinning.

    I think this article can be summed up as follows:

    1) Buy at defeated lows

    2) Turn off computer and go fishing when people are happy

    3) Repeat

    4) Hold

    5) Establish a trust and convince children/grandchildren to do the same or donate to a charity that will do so.

    Personally I modify that by just buying a little all the time, and trying to modulate the level of my purchases by keeping it somewhat inverse to my panic/euphoria levels. Not always successfully.

  • Report this Comment On October 15, 2011, at 5:40 AM, reflector wrote:

    it's a good idea in theory.

    but right now is not the time to be long in the stock market.

    our economy, and economic system even, is rotten at its very core.

    you can't build a tall building on a foundation of mud.

    until the structural problems are resolved of a crushing deficit burden and an ever diminishing value dollar which destroys peoples' savings, there is no sense in investing in the stock market.

    and yes, 2008 was just a precursor, the collapse was temporarily held in abeyance by QE, but it put us in a worse position now, in more debt.

    the big one is coming very soon.

  • Report this Comment On October 15, 2011, at 9:20 AM, digitalroom wrote:

    if stocks are so great then why the great majority of us lose our shirts investing? you forgot to mention that investing in stocks is one of the most difficult and dangerous things one can do to his financial investments. The majority of people don't have a clue as to how it works and so they're better off staying away from the market.

    the $1 invested in 1802 would be worth $700K today? This is a big fat "if." First off, the article does not mention what stock(s) this $1 was invested into and the time outlined here is outrageously long (209 years). This is not applicable to most people. This article gives people today false hopes that making money is easy (just invest and forget it...just like the "one dollar" theory). You'd be hard pressed to make money in stocks in today's world w/o having a thorough knowledge about it. Once you invest, you'd better be ready to spend a lot of time thinking about how to win because, most of the time, the second you click "buy" you're going to see your stock drops in value. The world we live in today is far different than 209 years ago. It's much more difficult to win because of the level of corruptions, greed, etc., etc. The game is definitely rigged (read the recent article on Rajaratnam's arrest!) Just ask all your friends how many of them are making money playing the market? Bet you know most of your buddies have lost a lot of money and some have lost huge amounts. There are probably 99 losers for every one big winner in the world of stock market investing (how many W. Buffett do we have in this world today?). To the beginners, I'd say do not invest even $1 if you don't know what you're doing! Be warned!

  • Report this Comment On October 15, 2011, at 9:26 AM, FutureMonkey wrote:

    The corollary to Stocks for the Long Run is -- don't allocate money to the stock market you can't afford to lose in the short run.


  • Report this Comment On October 15, 2011, at 9:27 AM, FutureMonkey wrote:

    Survivor bias generated a lot of that $700,000 return -- as JM7 above stated, a dollar invested in a buggy whip manufacturer in 1802 is worth nothing today. The conclusion would have to be that anybody following Siegel's logic and numbers would be indexed or an active trader with a reasonably diversified basket of stocks -- in which case they need to be as good or better than 80% of the professional mutual fund managers.

    Which is why modern portfolio theory, rebalancing, and dollar cost averaging are probably good ideas for the majority of folks investing for retirement.

  • Report this Comment On October 15, 2011, at 9:29 AM, FutureMonkey wrote:

    Hey Morgan - what would a dollar invested in real estate in 1802 be worth today?

  • Report this Comment On October 15, 2011, at 9:34 AM, cmfhousel wrote:

    <<the $1 invested in 1802 would be worth $700K today? This is a big fat "if." First off, the article does not mention what stock(s)>>

    A broad market index similar to the S&P 500 (comparable indices can be recreated prior to 1957, when the official index was born).

    <<the time outlined here is outrageously long (209 years). This is not applicable to most people.>>

    This is addressed in the article.

    <<Hey Morgan - what would a dollar invested in real estate in 1802 be worth today?>>

    This isn't mentioned in Siegel's findings, but other very long-term studies shows nationwide real estate more or less tracks inflation over time:

  • Report this Comment On October 15, 2011, at 10:32 AM, FutureMonkey wrote:

    Thanks for the link Morgan and the article.

    No doubt in my mind that compared with other asset classes equity markets provide the opportunity for the best returns...over the long run. Not surprisingly some of the greatest risk in the short run.

  • Report this Comment On October 15, 2011, at 12:44 PM, Merton123 wrote:

    There are only so many places a person can invest money (REITs, Stocks, Bonds, personal residence, and maybe rental properties). During the lost decade had a person invested in Tweedy Browne Global Value Fund your average return would have been 6 percent. How many people are going to invest in a value mutual fund when the stock market is soaring? Generally speaking almost every 10 years there is some sort of financial calamity (e.g., savings in loans crises, tech bubble meltdown, and now mortgage crises). This is when value investing averages move up and growth investing averages move down.

  • Report this Comment On October 15, 2011, at 2:07 PM, TMFDarwood11 wrote:

    Good Article. I always put them into a personal context.

    I find it useful to remember that the average person will probably accumulate the majority of retirement investments over a span of 30-35 years (age 30 to 60 or 65).

    Upon reaching retirement age at 60-65, the next 30 years will be defensive and the investments will diminish as they are drawn down to live on in retirement.

    Using generally accepted allocation recommendations, for the first 20 years 90% might be invested in stocks. This will decrease to possibly 60% in stocks for 10 years, and by retirement age that might be 40% in stocks, if, and I say "if" one can accumulate sufficient cash for "safe" assets in a 5-10 year bucket once in retirement. If not, then the percentage in stocks age 55 and above might actually be lower.

    So outsize returns may only occur for 20 years, if one happens to be buying stocks over a couple of decades which are not a bear or sideways market.

    I have always thought that analysis of returns over 30 year windows, or sliding average returns, were a better choice for stock market returns.

    The above is why I am somewhat critical of most of the articles that quote Siegel and some of his findings. I think it's really important to put the information into a useful context. I don't really care if the market will be up, down or sideways 150 years from now. I also respect Siegel and do like his analysis. The issue is how to responsibly use this type of information. If I were Bill Gates, I might be more interested, as I have a multi-billion dollar legacy to invest for my descendants.

    Meanwhile, here on the ground, in the stock market in which I invest, we moved from what some called the "lost decade" into what I describe as the "white knuckle decade." I've seen studies that indicate that a significant amount of retirement savings accrues after age 50. That's a historical simplification, too and there are a lot of people in the US today at age 50-60 who are struggling to pay off debt, instead of building up retirement savings.

    Me, I've got 49% currently in cash and bonds which includes 10 years in "very safe" assets. Not perfect, as anything can happen.

    Why this personal bias? I'm in "phased retirement" which means still working sufficiently to pay the bills and not take either SS or withdraw from retirement funds. That will change in a year or so.

  • Report this Comment On October 15, 2011, at 2:39 PM, TMFDarwood11 wrote:

    To continue, if I use the SA as a benchmark, then over a decade, it's possible to achieve gains of about 85% on my stock portfolio (I saw a flyer which stated average gains of about 69% over the S&P 500, while the S&P is up about 14%; this over a decade).

    So in my investing lifetime, if I go with some of the brightest on the planet, those types of gains are the best I can possibly achieve.

    Maybe I'll do better, but I doubt it! In fact, an average investor will probably do worse.

  • Report this Comment On October 15, 2011, at 2:40 PM, TMFDarwood11 wrote:

    Oops - can't add, probably why my portfolio results are what they are!

  • Report this Comment On October 15, 2011, at 4:00 PM, FleaBagger wrote:

    What if the last two centuries are, overall, an exception amongst the millennia?

  • Report this Comment On October 15, 2011, at 5:08 PM, daveandrae wrote:

    As of today, the average holding period for a stock listed on the NYSE is a whopping seven months....and dropping if you ask me. Thus, the idea of HOLDing onto shares of even a blue chip business through all it its vicissitudes over a 25-50 year period is repugnant to most people.

  • Report this Comment On October 15, 2011, at 6:43 PM, Merton123 wrote:

    I believe the key to investment success is to follow Benjamin Graham (Warren Buffet's mentor) disciplined approach to investing. Benjamin Graham mutual fund that he ran outperformed the averages by 10% quite a feat in his time. He did take some concentrated bets like putting 25 percent of his portfolio money in GEICO which lead to his outsized return. However, even when investing in Geico Benjamin Graham didn't depart from his Value based discipline. His most famous protegee Warren Buffet later on takes over Geico and used the float to make investing history.

  • Report this Comment On October 15, 2011, at 6:50 PM, TMFDarwood11 wrote:

    The article at the "Economist" entitled "nowhere to hide" sums up the current problem for investors.

    "Nowhere to hide

    Investors have had a dreadful time in the recent past. The immediate future looks pretty rotten, too"

    But, in 75 years, This period, too, will just be another blip on the timeline of investment history.

    So while Siegel might be bullish on stocks for "the long, long run" most people are today "bearish on stocks for the near term."

    I do think Siegel's arguments will win out, But will the stocks be those of the "BRIC 500" index, which replaced the S&P 500 in 2020? Who knows?

  • Report this Comment On October 15, 2011, at 7:27 PM, Indiscr33t wrote:

    Unconventional Economics: Operation Twist 2 is QE3 - October 15, 2011

    In 1961, the Federal Reserve instituted a policy known as Operation Twist wherein short-term treasuries were sold and long-term treasuries were purchased; the intent was to encourage the strength of the dollar with increased yields on short-term treasuries and to encourage investment with decreased yields on long-term treasuries. What would a modern version of Operation Twist achieve assuming it was the only policy in action? Short-term treasuries would have increased yields (above the .25% currently), long term treasuries would have a decreased yield (below the 3.30% on 30Y treasuries on September 21, 2011; this date will be addressed later in the article), the dollar would strengthen as higher yields on short-term treasuries would attract buyers, the lower yields on long-term treasuries would encourage investment into stocks as lower yields on long-term treasuries provide negative real returns when inflation is factored in, and commodities would see their values go down as it takes fewer stronger dollars to buy the same product that once required a larger quantity of weaker dollars. Take note, these would be the modern outcomes if Operation Twist were the only policy in action.

    Capitalism has many mistresses, so it is no surprise that: “Honey, there are others.” As we recall, the Federal Reserve announced this summer that the Federal Funds rate will remain at 0 to .25% until mid-2013 in light of recent and persistent economic headwinds. Additionally, QE2 announced last year initiated a $600 billion bond buying spree that ended in June 2011, the result being extremely low short-term treasury yields (as the Federal Reserve is their dedicated buyer) and the lowest possible long-term treasury yields available without buying those long-term assets directly (low short-term treasury yields have a modest effect on long-term treasury yields as they only paint the picture of a small portion of the risk environment over a 30 Y treasury note’s existence). QE2 also weakened the dollar as billions were manifested from nothingness, and commodities went up in value as a larger quantity of weaker dollars were required to buy the same product that once required fewer stronger dollars. This September 21, 2011, Operation Twist 2 was announced, and unbeknownst to many, QE3 was initiated.

    Put very simply, starting October 3, 2011, Europe didn’t matter anymore for the United States. This was as a result of a massive government intervention NOT in Europe, but in the United States. Don’t believe this? To the charts we go!

    Operation Twist 2 should have made short-term treasury yields higher, but it did not. Examine the Federal Funds rate on the 1 Month US Treasury Yield and find that these rates are locked at nearly zero. These rates are locked in at 0 to .25% until mid-2013 as per another Federal Reserve policy. Consistently low short-term treasury yields are reminiscent of QE2.

    Operation Twist 2 should have reduced long-term treasury yields, but it did not. Examine the 30 Y US Treasury Yield and see that the yields did initially fall to about 2.8%, but once the bond buying by the Federal Reserve began on October 03, 2011, the yield actually increased to 3.22%, and continues its steady climb upwards. Higher long-term bond yields do not necessarily reflect QE2, but they do reflect a belief amongst investors that they should receive higher yields for inflationary pressures that they will inevitably encounter over a 30 year lifespan. In that case, this demonstrates a great deal with respect to what investors believe an inflation-appropriate return on a 30 Y treasury should look like. Think about that: Inflation! Just a few days ago everyone was worried about deflation and negative GDP. Inflation makes bond yields increase and the stock market rise exponentially. Any questions, just ask the 80’s. Once again, the prospect of inflation is reminiscent of QE2.

    Operation Twist 2 should have made the dollar stronger, it did not. While the dollar did strengthen between the announcement of the program on September 21, 2011, and before the long-term treasury purchases were initiated on October 03, 2011, the result since the purchases have been made is a falling dollar. Examining the USD Index, the dollar has fallen off of a cliff since Operation Twist 2 was initiated. Operation Twist 2 has made the dollar weaker as did QE2.

    Finally, commodities should have decreased in value as stronger dollars are required in a smaller quantity to purchase the same dollar valued commodities. Following the Federal Reserve’s announcement of Operation Twist 2 on September 21, 2011, commodities did fall as evidenced by the Dow Jones-UBS Commodity Index. This, however, was reversed starting on October 03, 2011, when the commodity index skyrocketed following the actual initiation of the Operation Twist 2.

    Receiving massive amounts of cash as bond outflows are invested into stocks; the stock market has rocketed above the once insurmountable 50 day simple moving average and will continue upwards at least to grab a hold of the 200 day simple moving average. It is likely that the SP500 will cross the 200 day simple moving average as it begins a new bull market.

    Why is Operation Twist 2 not occurring as intended? There are three schools of thought:

    1) The Federal Reserve decided to buy the long-term treasuries but delayed the sale of the short-term treasuries, resulting in an increased balance sheet and the creation of dollars.

    2) The Federal Reserve scared away actual real-life buyers of long-term treasuries as those buyers realized that the Federal Reserve wasn’t buying treasuries from actual real-life individuals, it was actually just buying long-term treasuries it manifested into existence, resulting in an increased balance sheet and the creation of dollars.

    3) The Federal Reserve decided to buy long-term treasuries and did not delay in the sale of short-term treasuries to fund the long-term treasury purchases. However, the Federal Reserve in a separate statement made it clear that short-term yields are to remain near zero, so the Federal Reserve creates money so as to remain the dedicated buyer of short-term treasuries and to keep true on its near-zero yield promise. As a result, the balance sheet is increased and dollars are created.

    Europe officially doesn’t matter anymore as the Federal Reserve is essentially executing QE3 and European leaders are saying, “Move along, nothing to see here.” Dollars are being created; trade against that notion at your own risk.

  • Report this Comment On October 28, 2011, at 6:13 AM, thidmark wrote:

    Why do people feel the need to make a comment longer than the article?

  • Report this Comment On March 11, 2012, at 6:59 PM, wolfmansbrother wrote:

    "if stocks are so great then why the great majority of us lose our shirts investing?"

    Because most investors buy the "hot" stocks that everyone else is buying and end up overpaying. When the inevitable correction comes, most people panic and sell out for a loss.

    The trick is to do the exact opposite.

  • Report this Comment On September 09, 2015, at 5:17 PM, Readdd121 wrote:

    The gem in Morgan's article here, it seems to me, is the thesis that equities are SAFER than bonds during any ten year stretch...maybe you all are familiar with it, but all I've heard heretofore is the equity "risk premium"; you get paid more long term in stocks to account for the risk, and this idea turns that on its head...thought provoking, as usual, thanks, Morgan!

  • Report this Comment On September 14, 2015, at 3:04 AM, daveandrae wrote:


    That's how much my personal investment portfolio has appreciated since the October 2011 lows; which rounds out to roughly 13.9% on an annualized basis. And I'm ignoring the stock I sold in 2014, 2013, and 2012 to buy other, tangible, productive, assets and improve my home. Yet, this figure includes all of the subsequent declines.

    Most notably, the latest one.

    My turnover ratio?

    Practically, negligible. Haven't sold a single share of stock from any position in almost 15 months. Still holding the same five, boring, positions I was holding all throughout 2011. Bought some more of one on August 24th, 2015 too. ( I love buying things when they're on sale.) Before that I sold down less than 1% of my portfolio in July of 2014.

    What really strikes me is how blatantly bearish and thus way off base most of the commentary is with regards to this column. Buffett wasn't kidding when he said fees and pessimism are an investor's worst enemies.

  • Report this Comment On January 02, 2016, at 7:33 PM, boogerface02211 wrote:

    If the S&P 500 is around 2,050 and earnings are $112, isn't the PE ratio 18.3 rather than 11?

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