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Racing the earlier gains after European officials suggested that the unpopular Cyprus banking deal.
Could actually become a model for other European bailout this.
Like today's drop could turmoil overseas actually be -- -- thing for our markets and economy.
Let's figure that's what I would Jeremy Siegel he's professor of finance at the Wharton school of the university Pennsylvania.
Professor Siegel think you.
And we were just talking here about a week and a half ago about how you at a very bullish outlook for.
The S&P 500 that was before Cyprus blew up now you're not exactly but the crowd was worried about this you say this could be a good thing for our markets hops up.
Well first of all I see interest rates going down remember the ten year was over 2% it's down.
The Vicks index which was hitting those is now up a little more so actually I think the base.
For a -- movement in the stock market is stronger now.
That it was a couple weeks ago I don't think there's going to be contagion.
I think the you know the new solution was certainly better than.
The old one I mean you're busy is going to be in the dumps for a long time but financially I don't think -- gonna have a crisis -- spill over -- the US well let.
And push back a little bit here -- what one thing that concerns people alive is.
That when when you halt banking activities because the crisis like -- -- you create a pressure cooker in the longer that that -- is on top of the pressure cooker.
The bigger explosion you get when the -- is finally taken off.
If they decide to keep that lid on a few more days could it not spoke enough.
Enough investors not only in the Cyprus banking system but in other parts of European banking system the people just.
Have runs on banks all over the place over there and that would spill into the US markets would -- not.
Well the person involved in of the Cyprus -- was.
Had -- awful lot of bad lending that was really a lot worse then the major banks that we see in Portugal and Spain which Mario Draghi says listen I'm I'm opening up our.
Our discount window I'm opening up our bond borrowing window -- guys they're basically said that to Spain and and even to Greece.
You know the Cyprus situation.
Was -- an extreme and they know what we did say this small depositors.
There I think the large depositors should take a hit it should realize.
That you have some of their funds are at risk day on dot governor -- my -- and I -- I -- they're -- big difference between that and and -- and Spain and Greece.
Right by the professor just to push a little more might that not lead to a two bank runs because if if nobody's money is safe then people might think -- my money's better off.
In goal -- -- even US treasuries.
But I think the difference here was a commitment that -- he -- To the banking system in Greece.
To the banking system in Spain and -- called that we have our discount window open need to borrow anything you need to -- well.
Not be -- run on the bank -- there's a run on the bank you can have these euros to pay it out.
He explicitly he never said that to Cyprus.
That was never qualified to do that.
And therefore I think it is in a special category compared to what we see in the rest of Europe.
You've been awfully bullish saying that the S&P 500 could within the next year and a half maybe even hit 17100.
Don't we need a strong.
GDP the output of all goods and services to generate better returns for stocks in the stock market -- what are we kind of bubbling along here with our GDP.
We are modeling with the GDP there's two major ingredients to do it to a stock market.
And one is it certainly is earnings which does depend on an economic growth.
But also there's a question solve the multiple that you -- earnings I think that most of the up move that we're gonna see.
Over the next two years.
Is going to be multiple expansion.
We're selling thirteen and a half fourteen times 2013.
In a low interest rate environment that isn't very very cheap we can easily get up to 1516.
Seventeen and not be out of line with historical experience so I think it's multiple expansion that is going to be the key because again.
We we know there's ten trillion dollars either in money funds or in bank accounts earning -- people are eventually gonna say hey.
I'm -- I'm gonna go get some of that dividend link up I'm going to I'm going to move back in the market it is only done it a little bit.
So far I mean we we we could see much bigger movement and a movement that I think is.
By the fundamentals behind the market are you surprised that more money hasn't come out of the bond funds there's been a lot of money going into stock funds that's for sure.
But there hasn't been a big drop off.
Frankly not at all of money for in bond funds why not.
I think -- again.
A lot of people cling to those bond funds because if there is a crisis like we saw in Greece.
The treasury market pops up a little bit if you hold some Treasury's gonna look at -- and say hey that cushion the decline them.
In the portfolio it is in my opinion an extremely expensive insurance policy holding those -- -- -- a little comfort.
Because -- actually he's a what if inflation starts to hit and then people think that campus money on bonds inflation you definitely could apps -- absolutely.
If inflation -- it's gonna lose its insurance policy it's gonna lose its store of value.
It could be a double whammy against the -- on market you know I absolutely with -- in a note today still people's -- -- was -- with.
With Cyprus that that that game when the snipers -- treasury bonds rally.
And people are are comforted by that.
But my feeling is again exactly like you say.
Once inflation becomes more of a fear debt insurance policy will disappear -- and that people in the bond funds are going to be -- and.
That begs another question which is when do you think we are gonna -- we we heard Bernanke last week at a half a percentage point to is inflation target of two.
Now it's two and a half percent was 2%.
When you think it's really gonna start to be a concern for investors inflation.
-- yeah you're right he added and actually was a little while ago a half a percentage of the shook port Ron -- -- we will tolerate up to two and a half percent.
Realistically it's probably going to be three or may be three and a half.
Do you want to stint with the bond that's less than two.
In an environment where the inflation has 300 -- I'm not one of these people.
Who think that inflation's gonna wrap up into.
You know the high -- single digits.
The way some people do but even at three and 4%.
Bonds you know cannot compete anywhere near it that left so true I think when Jeremy Siegel professor of finance at the Wharton school University of Pennsylvania good to see your professor thanks for coming in again -- --
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