Siegel Fires Back: Bullish And Proud Of It

Jeremy Siegel's latest column in Yahoo Finance responds to John Hussman and others, who argue that Siegel's irrational bullishness is setting him up to be come a modern-day Irving Fisher.  Siegel's response: The critics are wrong, profit margins are fine, valuations should be higher, and stocks are going up.

Siegel's main arguments are these:

• The hand-wringing about "record-high profit margins soon reverting to means" is misplaced because 1) a greater percentage of U.S. corporate profits are coming from international operations, which aren't affected by U.S. GDP, and 2) a greater percentage of overall U.S. profits are now captured by public U.S. companies instead of private ones.

• Innovations in the financial system, namely lower trading costs and smarter central banks, have reduced the equity risk premium.  Thus, stocks should now trade at an average P/E of about 20-times, instead of the long-term average of about 14-times.

Siegel, in other words, believes that "it's different this time."  And that's reasonable--because sometimes it is different this time (the most salient example being a permanent change in the relationship between bond yields and dividend yields after the U.S. went off the gold standard--a change that cost many "prudent" investors to miss decades of gains).  Of course, more often than not, it's NOT different this time, and those who argue that it is end up with egg on their faces (believe me--I know).

I'll wait for Hussman, Grantham, Smithers, DeLong and others to respond to Siegel's arguments before taking a strong stand here.  I will simply suggest that the big lesson from most major bull markets is this: anytime someone argues that "it's different this time," the burden of proof ought to be on them (as opposed to on bears who appear to be "wrong" because the market keeps going up). With this in mind, I'd like to see more data from Siegal backing up his profits argument--a chart showing the percentage of U.S. profits generated from international operations over time, for example, as well as a chart of global profits relative to global GDP (are profit margins at record highs globally, as well?). 

The "risk premium" argument obviously won't be settled until after the fact, but in my mind there's an easy counter to that one: Today's risk premium is low because stocks haven't been that risky recently--even with the crash of 2001-2002, global equities are sharply higher than they were 10 years ago.  Go through a couple of decades of stagnation, meanwhile, like the periods that followed market highs in 1929 and 1966, and investors won't give a damn about low transaction costs or more enlightened central banks.  Instead, because stocks will seem like the worst investment idea anyone ever thought of, investors will once again demand a huge equity risk premium.

Comments

[mla]

Great post. Thanks for clarifying that article -- I wasn't clear on a few of Siegel's points.

So, U.S. GDP only measures the production within the United States itself?

I guess I had assumed that U.S. GDP included anything produced by U.S. corporations regardless of geographic location.

If it's only U.S. production though, then it does seem like we need a different way of measuring profit margins (regardless of whether he's right at this point in time).

Is there any measure of total U.S. corporate production that can be compared apples-to-apples with U.S. profits?

[a]

Siegel was bullish during the whole 2000-02 decline. He's an idot.