Irene
Hi everyone. Thank you for joining today's webinar that WisdomTree is hosting titled Navigating Market Headlines, where you'll hear from Professor Jeremy Siegel, WisdomTree's Senior Investment Strategy Advisor and Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania, Jeremy Schwartz, WisdomTree's Global Chief Investment Officer, and Kevin Flanagan, WisdomTree Head of Fixed Income Strategy. So with that, I'll turn it over to Jeremy Schwartz to get us started.

Jeremy Schwartz
Well, thanks everybody for dialing in. I think this might be a record for certainly the amount of registrants we've had on one of these Professor Siegel calls, and a lot of interest for sure on much more than just headlines, a lot of big, big events happening. Today, a green day, Professor, good to be on with you. It'll be interesting to hear your reviews on the whole banking crisis round two, what you see from the Fed. The ECB came 50 this morning, some people thought they might start to say, "Hey, all these fears..." And certainly there's a lot of questions came in about Credit Suisse, and all the events there.
Kevin will share some ideas on what's happening in the fixed income markets. But we're here for you, put some questions... We already had 90 questions come in. We're going to try to get to the most relevant and broad-based questions, but we're going to get the professor to kick us off with his opening comments, and then we'll start hitting your questions.

Jeremy Siegel
Well, clearly the green today had to do with the infusion of deposits by some of the major banks into First Republic, which is a good thing. Just blanket, there's not going to be any depositor losses, the Fed is going to stand behind them. I always had confidence in them. I do have an account over $250,000. I did not take a penny out of it. It's a regional bank. I knew that they were going to stand behind the banks.
But let's talk about what this means to the economy and what this means for the stock market. First of all, of course we have the Fed meeting next week. Well, let me give you my prediction and try to shape what's going to happen. I do think Powell's going to do a 25 basis point increase, but signal strongly, without committing, that there will be a pause after that. He will not commit it, but he would say, "Further increases depend on financial and economic developments."
They will never commit further on. That is basically what my prediction is. Now maybe a little stronger today. Yesterday, basically, Marco was predicting one and done next week, and then no more, and then start reducing them at the end of the year. When confidence comes back, they get a little bit more aggressive on what they fixed. Now, because this is a quarterly meeting, we're also going to get that famous dot plot, which is projections by FOMC members of what they expect the federal funds rate to be over the next three years.
Now, the interesting thing is that normally they do their calculations about two weeks early before SVB. I'm sure that their calculations as the market has changed, they have changed, and I hope that Chairman Powell certainly gives them the opportunity on shifting what they think is going to happen.
My feeling is, is that many of them are going to be more aggressive than what the market thinks and that might scare the market when that announcement is made. That's going to be at two o'clock on Wednesday. They'll say, "Oh my god, look at, the FOMC members are still really hawkish in terms of that." One should remember that all those projections are on tissue paper, and that do not mean very much at all. They are totally data dependent and they're getting more data dependent, and clearly as a result of activities, are super data dependent. They really don't know what's what direction will go, how strong things will actually turn out.
So I always view those dot plots as sort of very vague intentions without a lot of meaning. Yet, I do warn you the market pays attention and they may be surprised that many of the Fed people might be hawkish on that. So you might see a little bit of a selloff at 2:00. At 2:30, when Chairman Powell gets on and gives his talk, I think he is going to be more cautious. You might see a rally in the market on that.
All right, let's go back to what happened, SVB. I think more of the consequences of it. I mean they violated banking 101 week two, which says never borrow short and lend long, because if the term structure inverts, and short term rates go above long term rates, you're going to be in trouble. It is absolutely beyond my wildest imagination that when they received huge inflows of deposits over the last two years, they put them in treasury bonds with durations of 10, 20 years and more. I mean that is the most foolish thing that one can do. Now, maybe at the time they did it, those long rates were a bit above the short rates, but the speculation and the risk was right.
Had they put those deposits in 90 day treasury bills and just rolled them over, there would be no story whatsoever. There would be no crisis. There would be no run. And 90% of the people who never heard of SVB and Silicon Valley Bank would still never have heard of it. That's what they should have done. So it was a gross mistake by management. I mean all of a sudden they got hundreds of billions of dollars. "Well, what are we going to do with it? Well, let's go with treasury, because we know we can get loans against treasuries of we have through it. They're very liquid. They satisfy the capital requirement. And look at their, they're yielding 50, 75 basis points over the bills. So let's take the margin."
Terrible, terrible mistake. As people who've listened to me knows in 2020 I called the end of the 40-year bull market in bonds, where the 10-year went from 16.5%, and I said, "It's on its way up and this is just breaking the market." But nonetheless, that's what they did. Then afterwards, they managed it badly. They should have gone to the Fed immediately when they noticed this shortfall and had to report it and establish a line of credit with the Fed. Or actually done maybe similar to what they're doing with First Republic, gotten some big depositors to pledges stay in and then you wouldn't have had a run on it. So many mistakes were made that it is quite mind-boggling to me.
That's what happens when you specialize as they did with the VCs and venture capitalists, and you don't know the macro, deposits come in and you make a fatal mistake and you never borrowed from the Fed before or arranged it and you didn't know how bad, management. Anyways, what is the consequence?
Clearly this puts a chill in lending everywhere. I mean, some experts say that the chill in lending, I mean, now everyone's going to be looking over their back, "Well, what are the regulators going to say? Are they going to approve this or not approve this?" They got the liquidity. They've got the reserves, but yet this is a chill. It's a chill equivalent probably to at least one or two tightenings of the Fed. And that's why the Fed has to go low. I mean, in other words, the tightening of financial conditions, lending conditions substitutes for a rise in the federal funds rate.
And actually there's a lot of things the Fed is not aware of and I've criticized them over time, but that is something the Fed is aware of, and that's clearly... So in other words, they'll go 25, but what you've actually seen is another 25 and 50. Why I don't think they're going to go zero, I think that that was speculated on Monday, Tuesday is the following reason. What's more important is the forward guidance that is going to give than whether they go zero or 25 now.
Secondly, I think they wanted to say, "We're still in there for the fight of inflation. We're not giving it up," while some people might claim they are giving it up if they stop. And believe it or not, the data are not falling apart. I mean actually today's data, first of all, very encouraging on the producer price index. But today's data with claims going down below 200,000 again and housing starts well above expectations. Now that is the month of February, and conditions have tightened in March. I don't think housing starts are going to be as robust, and I don't think home sales are going to be as robust.
I see the mortgage, I have the 30-year mortgage on my screen, 6.97, it was almost seven and a quarter a week ago, before this recent... They'll probably go down a little bit to probably six and three-quarters, but way above the six that we saw at the beginning of February. And nonetheless, housing starts are strong. Initial claims are down. The economy's not disintegrate.
For March, those were February, we got a weak Philly Fed report, and one of the first. Manufacturing reports have been weak, so we have to keep our eye on that going forward. But the estimate by most forecasters for first quarter GDP is a rise of two to two and a half percent, some even thinking maybe two and three-quarters. But we'll have to see how March actually turns out. Now that is an annualized rate and that is over a half a percent.
One has to remember that the last December, they thought it was the GDP would only rise a half a percent over the whole year. So first quarter has been stronger on a demand basis than expected, which is good for earnings. And in a couple... Well, in April we'll start getting the earning cycle for the first quarter actually going on.
What does this mean for valuation? Well, bringing the market down, we're probably at 17 and a half times, 18 times earnings now in the S&P. My feeling of long-term normal PE should be 20, 19 to 20. I do realize if we have a recession, that the stock prices react negatively, even though they should never react as negative as they do. I was asked on CNBC yesterday about recession. I raised my probability, but I said, I thought it would be mild.
What I think is important is, this is, I think, the type of shock that Jay Powell and the Fed needs to realize that their tightening was one of the fastest in Fed history, and perhaps went too far. I mean it would've been worse if they kept on hiking and hiking, and we had some big crisis in October with rates much higher. So in some sense, this is good news. I am more optimistic about 2024 and beyond, even though the chilling effect of this shock may result in lower GDP and perhaps earnings in 2023.
Stock prices have been hit. And we all know, listen, I mean, clearly value stocks which had such a stupendous comeback last year have really taken it on the chin, and even since this crisis. And the reasons are absolutely clear, we've had a big decline in interest rates, which favors the long duration stocks. And the probability of recession, which doesn't do well for value stocks, particularly as energy and banking, which are lower PE stocks have taken it on the chin a lot. So you really have seen a huge shoot up of that.
But that also means that the valuations, and maybe Jeremy and Kevin can comment on that more, I mean I looked at the S&P 400 MidCap, and on this year's earnings at 14.2 and the S&P 600 SmallCap is 13.8, and probably the value section of the S&P on this year's forecast earnings is probably in the neighborhood of 15.
There's so many things to cover, but I think I'm going to throw it to Kevin and Jeremy. And then to the questions, some of which we received beforehand, and some of which we may receive during this Zoom meeting.

Jeremy Schwartz
Let me just give two quick comments based on what the professor just said. If you want to see a daily dashboard on valuations, and it's also where you can get the Professor's weekly commentary, on our website there's a page called strategies at the very top of the website, and under strategies, the first link is called On the Markets, and his commentary is right there sort of second link under quick links. But the first link is our daily dashboard, and page 13 on that, go through all the valuations across the benchmarks like the professor was talking about. And we see Russell large-cap value at 14 times. The mid-cap values could be 13 times.
And with WisdomTree, because of our dividends and earnings weighted approach, you're getting 10 times, and across the board, across our earnings weighted strategies, 11 times earnings in the small-cap strategies. But even just the large-cap dividend payers are 14 times. There's a lot of great information on those daily dashboards that you can get it... We update it every morning, so that's a good place to find that.
Professor, there's a lot of questions that came in, it's hard to know where to start, but let's stick with stocks for the long run theme. A few questions came on, people entering retirement with this crisis and volatility, how should they be thinking about allocations and that equity risk premium? Does this change anything for you in, if people are getting close to retirement and are getting nervous about the volatility, how they should be thinking about it?

Jeremy Siegel
I think this is a volatility event that is going to be well controlled, has been well controlled and will not spread. This is a 100% different than the Great Financial Crisis, where the big banks had bad loans. This is not a question of bad loans, and these banks have been stress test for bad looms. And as I said, at most a mild recession, there's no question that the banks are absolutely fine.
I think the 220 earnings that are forecast for 2023 is a conservative estimate. Now, if we do have a recession, it may dip to 215, maybe 210, but then it has a great chance of jumping to 230 and 240 in 2024 when this is over, and the Fed finally gets the inflation down to a lower amount. So my feeling is, yeah, if we could have sold the day before SVB, you would've maybe saved about 5%. I don't think this market's going down much further.
I think interest rates are going to go down, because I think the Fed, as you saw, we've had a big bond rally because bonds don't have to worry about earnings, the treasuries. The stock rally, they like the lower interest rates, but the fear of recession going up depresses the numerator of the valuation equation. And that of course is why stocks have gone down while bonds have gone up.

Kevin Flanagan
I just wanted to hop in on that volatility aspect of the conversation. Looking at it from the bond market perspective, the MOVE index is essentially the VIX when you're looking at it from a bond market perspective. And even prior to the news about Silicon Valley Bank and Credit Suisse, we had been seeing elevated readings, but with this, the volatility quotient has just gone to a whole other level going back to levels not seen since 2008, 2009.
And we got a few questions about floating rate notes, buying treasuries, what should people be looking at in the fixed income arena? And I thought it would be a good time just to provide a little bit of perspective, that in times like this, often you see investors move just into short data treasuries, let's call it a two-year note. And the amount of volatility there has just been remarkable over the last few trading sessions.
I was on the West Coast last week trying to follow Powell, and his, what we used to call, professor, the Humphrey Hawkins testimony. And how he was talking about potentially opening the door for a 50 basis point rate hike and watching the two-year yield surge to 5.05, and yesterday it got down to as low as 3.71. I think we closed today at about 415.
So the way that I'm looking at it is actually if you are looking at investing in treasuries, because I think a lot of investors are looking at what is available as alternatives, and you do have treasury yields here, specifically in treasury floating rate notes, that are one of the highest, if not the highest, yielding treasury security with none of that corporate credit involved. You're just talking about treasuries in this environment, and it checks off a number of boxes, more specifically, because it's reset every week with the three-month T-bill option.
So essentially what you're finding out is you're getting income without that type of volatility that we've been seeing even in the front end of the treasury market. And we've gotten a lot of questions, we have, our floating rate treasury fund, USFR, where we've seen money moving into it because the Fed was in an active rate hike cycle.
And now I think investors are also looking at this as a solution to focus on income without that volatility. And so when investors are saying, "What do I do?" Because sometimes you get a sense, right professor? Of almost paralysis in this kind of an environment. So what we would say, treasury floating rate notes are certainly an area for investors I think to be considered.

Jeremy Siegel:
And by the way, if you are worried about banks, now I just told you I don't think you have to be, but if you are worried about banks, these are treasuries, US treasuries. So you're getting a much higher interest rate on that. Jeremy, you have something to say about the banks? You were talking before the meeting-

Jeremy Schwartz:
Yeah, no, one of the lines I've been using internally, we just came it up with it last night, but so maybe the banks aren't failing directly because of now the government backstops and maybe the banks won't fail, but they're failing you by not paying the interest rates. And there's sort of a record shortfall between, if you go back to the '80s when we had the interest rates with double digits, your checking account would pay you double digits. And so some of this issue is sort of the banks own making.
And I mean, actually even Credit Suisse, who are in the headlines this week, as their default rates were spiking, there was a story, I don't know if this number was true, but they were saying they were trying to start paying 6% on their deposits to try to keep capital in their bank accounts. But the average checking account is not paying anywhere near even one. So you could get close to five in the floating rate treasuries, which to me says these banks are going to still be under pressure in some sense. Deposit flight is real, it should continue, that people have way too much cash in the check account, and they didn't think about it because there was no rates, so didn't matter. But now you get five, you really do need to think about it.

Jeremy Siegel:
Don't forget it was a year ago only that they started raising rates. So for 10 years you had zero, and people got lazy, "It's always zero." Now it's five, and the banks are trying to squeeze you. Many of them are paying, as you say, less than one on checking and maybe on your savings two, and maybe on CDs three or four, very reluctant to go up. They say, "This is lazy money that doesn't really move." I mean if you got less than 250,000 then you are explicitly insured. But you're getting an extremely low rate.

Kevin Flanagan:
Professor I wanted to ask you, I saw a question come in with respect to the Fed's response specifically on Sunday. Jer and I were going back and forth. Here I was again, another Sunday, trying to figure out what's going to happen when the market's open on Monday morning. But I wanted to get your sense and to educate our audience here on this new alphabet soup facility, the BTFP, just. What is it exactly? And why is it important?

Jeremy Siegel:
Well, basically, there's the explicit names of these facilities, but backing all these facilities is the Fed ready to supply unlimited credit. I remember back in the financial crisis when money market mutual funds were insured, and people said, "Well, just a minute using the exchange stabilization fund, it only has this amount of money." I said "Don't worry, the Fed is willing to do what it takes, lend whatever." So whatever these facilities names are, honestly doesn't matter. They may be tapping some sort of reserves of the FDIC or stabilization funds or this or that. The truth is the Fed is ready to lend unlimited amounts against their pledges, and have the ability without question to do so.
And I mean that's the important thing. I've talked about what ideal deposit insurance should be. First of all, I think the limit should be raised to at least a half a million, if not a million dollars. But I also think that all payroll accounts should be completely insured, because one of the tragedies last Friday, where some people weren't getting insured. Payroll accounts should be completely insured. And I actually think that all deposits above a limit, when it doesn't involve a loan that's questionable.
What you don't want is someone at the bank giving someone a loan of a 100,000 against questionable credit, giving him or her a deposit, the loan goes bad, and then the depositor says, "Hey, you insured me." But that's something that could be detected by the FDIC and authorities later on, lending against bad credit. I think actually if you just get $5 million and say, "I'm parking it in the bank," I think it should be a 100% insured, you're not getting a loan against it. And there cannot be fraud in that particular case.
Only case there can be fraud is when they create a deposit against a bad loan. And that is something that you may want to look at. Right now, it's blanket, whether you got the deposit as a result of a bad loan or not. But in a future system I think that some sort of distinction could be made. Which means that everyone who comes into a lot of money, maybe they sell their home, maybe they sell stock or they get an inheritance or something like that, and they decide, "Until I decide what to do with it, I'm putting $2 million in the bank." It's a 100% insured, there's no fraud. That's just an inflow into the bank. The question comes when the bank extends a deposit loan against it under what could be a fraudulent conveyance.

Jeremy Schwartz:
Kevin, let me come back to you. We talked a little bit about floating rate treasury, Andrew wrote in asking a question on... And professor, I'll get your comments too. Because when I've talked with the professor, he obviously talks a lot about Stocks For The Long Run, but within the bond market we've talked about high yield bonds as one of the place he particularly likes, you're getting 8 to 9% yields in high yield. With us, WFHY is our high yield ETF that has a quality filter to say these bonds have positive free cash flow. So there's some check on ability to pay back the bonds. Maybe Kevin, I'd ask you to comment quickly on, do we still like high yield bonds with some of this additional risk now? And then professor comment on general high yields.

Kevin Flanagan:
What was interesting to me from the bond market perspective where one would say, "This was a risk-off event." And actually if you looked at the way that the bond market, as well as the equity market, traded, most of the volatility that we were seeing as I mentioned before, seemed to be in treasuries. And if you actually look at what was going on in the US credit markets, yeah, spreads widened out, but it was interesting, I was doing a media interview yesterday, and the way the reporter phrased the question was, "Credit spreads have widened out but they've been orderly." And I thought that was quite an interesting observation from the media as well to kind of emphasize that point.
Yeah, I mean, high yield spreads, at one point, we've seen here moved out say about a 100 basis points, but you've seen a heck of a lot worse in prior times of duress in the markets. And it was interesting to actually I think come to that conclusion. So I think for investors who are focusing on where to get into high yield. At plus 400 basis points, there was some trepidation, well, now you're plus 500 basis points.
And to your point Jer, the yields available, the compensation is completely different, the landscape than where we were a year ago. And we've actually just recently wrote a blog on this, providing a cushion, that if you do have spread widening, you're talking about yields at eight point a half, 9%, not four and a half percent. And I think it's important, I joke that, "Bonds are math," and a lot of people they chuckle when they hear that, but there's a lot of truth to that. So I think from the high yield perspective, if you don't think as we're hearing here from the professor that this is going to turn into another systemic banking issue, but we could be headed towards a recession, you are getting compensated for that kind of risk at this stage of the game.

Jeremy Siegel:
No, I'm often asked being seen as the champion of stocks, "Dr. Siegel, do you hold any long-term bonds?" And I tell them, "The only long-term bonds I hold are junk bonds. The only ones." I remember in 19, I think it was, 75 when Vanguard came out with its first high yield bond, I put money in, and its returns are not as good as stocks, but not much below. It's kind of a hybrid.

Jeremy Schwartz:
I thought about the expected returns, when you talk about, hey, "The P/E ratio, if it gets close to 20," it's not a little bit below 20," but if you add the 5%, you get five to 6% real returns there and you add two to 3% inflation. Getting seven, maybe you're getting eight, maybe it's like an eight, and you're getting that on high yield today. So it is competitive. It's pretty competitive on where high yield is today.

Jeremy Siegel:
Yeah, that's true. I mean-

Jeremy Schwartz:
Different taxes.

Jeremy Siegel:
... you're right, you could say... But we're not there. We're actually probably... With an 18 P/E, you're closer to five and a half, maybe six on stocks. And then if you say two and a half to three, I think, eight and a half to nine, yeah, you're-

Jeremy Schwartz:
You're close. If there's no default, you're close.

Jeremy Siegel:
You actually are close. But one thing you've got to always remember about junk bonds, you never have that upside. I mean, if the they companies break out with great earnings, you're capped on what you can get on the upside. So a better than expected performance in the stock market would not get you any better than expected performance on the junk bond market.

Kevin Flanagan:
Well, Jer and professor, let's take it to the other thing. Since I'm the bond guy, I get to ask one equity question, and it comes from our audience as well talking about growth versus value here. Any change in our thoughts? What should we be thinking about going forward in a post SVB world?

Jeremy Siegel:
Well, as I mentioned in my opening comments, value takes a hit. And the reasons are, as they said, the two reasons, the lower interest rates, which gives a boost to the growth and the fear of recession. Value is always a great buy at a recession, fear, because it's the one that goes down the most. They're the most cyclical to the economy, oil, and of course now the financials, I think they're cheap. 
I mean it's always the best time to buy when they've relatively done the worst, because that's the bottom. How many of us all heard about, what was it, two years ago, how the oil sector was uninvestable. Many of the experts use the term uninvestable to buy any energy stock given the regulatory environment and everything else. And ExxonMobil yielded 10% on its common stock, a firm which has never lowered its dividend in its history. It was uninvested.

Kevin Flanagan:
It's hard to buy.

Jeremy Siegel:
Yeah, I mean it's hard to buy it. You look at it and I was said, "Wow," even I put some money and not a lot. But everyone was telling me, "These are uninvestable. They're going to run oil into the ground and all the rest." And I would still buy them.

Jeremy Schwartz:
That was somewhat the narrative for Europe and we actually had a few questions come on in international, similar question on valuations on international being even cheaper. Got the Credit Suisse situation in Europe. We've got-

Jeremy Siegel:
Which knocked it down, and I think that they're, obviously, taking care of that. You got what, 12 P/E in Europe now? It was up to 12 and a half, maybe it's 12 now, some are 11 and probably our screens are lower. One really important message about stock investing is that earnings growth beats out value in the short run. Value beats out the growth in the long run.
You give me the choice of a stock that's really selling cheap versus a stock whose earnings are growing faster for some undetermined period of time, I'm always going to take the former. And now value stocks are much cheaper. I mean a 13 P/E for value stocks turns into a seven to 8% real return in the long run, being real assets. Wow.

Jeremy Schwartz:
So if we talked about-

Jeremy Siegel:
That's ahead of the 6.7 220 year average that Jeremy I codified in Stocks For The Long Run. So really value stocks are now projecting in the long run to give greater than the long run return on stocks.

Jeremy Schwartz:
And international high dividend, if you go back to that market dashboard that I talked about, you could get some of the international P/Es, broad-based international with us has a 10 P/E. You go to international high dividends, it's below nine P/E. So over an 11% earnings yield. I mean these are definitely the depressed part of the market. It certainly is going to have some of those international banks and energy companies.

Jeremy Siegel:
What's the dividend yield on those, Jeremy?

Jeremy Schwartz:
Well, I think if you look at the average, it's probably in the five to sixes on those broad international ones. So it is pretty high.

Jeremy Siegel:
And don't forget when people say, "I can get five or six on bonds," remember that all studies show that in the long run, the stocks are inflation protected dividends, they move up with inflation. Bonds are absolutely not. So whatever inflation turns out to be, you're going to get that boost in your dividend. So I always tell people, when people tell me, "I can get four or 5% on bonds, and I'm looking at 2% and 3% dividend yield on stocks," I say, "Yes, but you're comparing apples to orange juice."

Jeremy Schwartz:
That ties to a number of questions on the inflation outlook. People asked about your views. You've commented a lot about M2, said declining M2. How does all that tie together for where you see inflation settling? How much inflation is still in the system? Those kind of questions.

Jeremy Siegel:
Well as the decline of M2, although moderate was the greatest decline that we've had since the Great Depression of the 1930s, the greatest decline on a year to year basis, calendar year basis, since World War II. Of a really a full stop, which of course I felt was too hard of a stop. Actually the money supply comes in with a lag, because they have to collect a lot of data on currency and all sorts of other liquid assets that they don't have ready.
So we got December later this month, we're going to get January. We actually began to stabilize that rate. I would like to see that money supply go up at the 5% rate that it went up for 34 years, between 1986 and the pandemic in 2020, and gave us the two to 2.5% inflation. And I want us to go back to that rate, not keep it declining as an overreaction.
Now, let me also say that given what's happened to SVB and the banking system, maybe people are going to be taking deposits out that may artificially depress that. So they're going into alternative liquid assets, which are kind of like money. So we have to be careful about interpreting those M2 statistics going forward. But they certainly were a very good guide in telling us about the inflation that we had after all the COVID relief packages, and I still think they're an important guide going forward. If the Fed starts lowering rates at the end of the year, which I think they should, I think you'll get back to loan growth and you'll get back to deposit growth, and you'll get back to a more normalized inflation outlook.

Kevin Flanagan:
Profess, there was one question I wanted to get to as well, while we just have a minute or so. The Fed balance sheet, there were a couple of questions about quantitative tightening. Any thoughts there? I mean we always get caught up in, are they going to go 25, 50, or nothing? Any thoughts on their balance sheet? Do you see any changes forthcoming?

Jeremy Siegel:
Well, there's some talk about would they halt it? You have to realize what they're doing. They're stowing their treasury bonds for the reserves. So they're paying four point... well, the Fed funds rate on the reserves about four and three-quarters percent, and basically giving banks treasury bills that are yielding four and three-quarter percent. Now reserves are a little more liquid than treasury bills, but they're both extremely high quality, I mean, among the most liquid asset in the world. So quantitative tightening really doesn't have impact, unless they shrink that reserve base, which they blew up during the pandemic to a level where they begin to impinge on the requirements that banks have for keeping those reserves.
My understanding is they're nowhere near that at the present time. So I don't think that quantitative tightening is really contributing to the problem. What's contributing to the problems that we have seen over the last week is the inversion and the sharp inversion of the yield curve.

Jeremy Schwartz:
We talked about treasuries as risk-free. Somebody asks about the debt ceiling, will they become not risk-free if there's some issue there? Is the political will there to come make that happen?

Jeremy Siegel:
Well, my story, good question Jeremy, I've said, "This is a game of chicken, where two teenagers are running their cars towards each other and who's going to turn first? They're not going to crash, they're going to turn at the last minute. It's going to get close, but they'll turn." I also say if all of a sudden people say, "Oh my god, they're not getting new agreement," they may miss a payment, and you see a big decline in the stock market over the treasury market, buy. Buy with all your reserves, because it's going to be resolved.
And even if the payment is going to be delayed, it'll be delayed a very short period of time, and then probably even compensated for with that very interest loss. It could be a buying opportunity at that very moment, but it's going to be resolved. Now, the longer term debt problems are really long term about we are piling on debt. I do not see a crisis from that angle for many, many years. Not in the near term.

Kevin Flanagan:
So Jer, I think we're under the minute mark here, so I know we have a hard stop at five o'clock. So any final thoughts, professor or Jer on what investors should be thinking about as we move forward in this post SVB?

Jeremy Siegel:
If you have cash, you're just getting a better deal right now than you did two weeks ago. I think the Fed has this contained, and I think this is going to knock some sense into Jay Powell's head.

Jeremy Schwartz:
Well, it took a crisis for him to realize the pivot, but the professor was calling for the pivot all along, and said that we were too tight. So this is very interesting. Well, professor, thank you always for coming on and sharing your thoughts with us.
If you haven't seen that strategies page that we talked about, you can get the daily dashboard, we talked about, sign up for the professor's commentary. We also have a new weekly insights communication that shares all the blogs our team is producing and our office hours. Thanks for dialing in and we'll be in touch soon. Thanks again.

Jeremy Siegel:
Thank you.