Taps Coogan – October 17th, 2022

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Wharton Finance Professor Jeremy Siegel, namesake of the Siegel Paradox and longtime commentator on markets, recently spoke with CNBC in an uncharacteristically dire rant in which he lambasted the Fed for misreading the inflation numbers and warned that they are going to cause a “depression.”

Some excerpts from Dr. Siegel:

“Let’s go to the housing sector, up 0.7% (month-over-month in the September CPI). That is totally ridiculous. Housing prices by every indicator are going down not up. Even rentals, talk to be people on it… They are saying ‘I can’t get the jumps I got earlier this year.’ That should be minus 0.7%, which by the way wipes out core inflation for September…”

“From March of 2020, the beginning of the pandemic, until this Summer when the housing market peaked, all the best indictors, Case Schiller…, said that housing was up 40%. What do you think the CPI housing factor was up? 11% because of the lagged way they put the rising prices in… What does this mean? We had so much more inflation over the last year and a half (than reported) because the inflation wasn’t in that housing (component). And now that housing is going down… will you see that housing element of the core (CPI) negative next month, or the month after that, or the month after that? No. You’ll continue to see that positive. It is imperative that the Fed recognize that that is not an indicator of what the real rate of inflation is.”

“A second really important point… When did the Fed start to tighten? In March. Is that supposed to work in six months? The Fed exploded the money supply in 2020… by more than any other year in more than 150 years. Did we have inflation in 2020? No. Did we have inflation in the first half of 2021? No. Then it started in the second half and the Fed said it was temporary so they didn’t do anything until March of this year… We started tightening in March. Are we supposed to see that in the core now? No. What do you see the tightening of the monetary policy in? ..What did you see the loosening of the money policy in two years ago? You see it in the housing market, you see it in the financial market, and you see it in the commodity market. All of those exploded in 2020, which showed you that inflation was definitely there and going to go into the official statistics. And what has happened to those three markets? They’ve gone down. When will it get into the core (inflation)? Months if not years down the line.”

“If the Fed waits for the core to get down to 2% year-over-year, they’ll drive the economy into a depression… I am not at all surprised by the number because the number… has no meaning for what the actual rate of inflation is…”

First things first, Professor Siegel was one of the few mainstream economists to seriously warn about inflation and risks to the markets throughout 2021, before the Fed pivoted. Unlike most, he is not a Johnny-come-lately on this issue. For that reason, the CNBC host’s question that Thursday’s hot CPI print proved Dr. Siegel as ‘wrong’ and “vindicated” the Fed is particularly rich.

As far as Dr. Siegel’s points, I couldn’t agree more though I don’t see this Fed, which is still comprised of the same ultra-doves that were doing QE in 2019, as continuing to tighten all the way to 2% CPI.

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