Stocks Are ‘Perfect Hedge’ Against Inflation, Siegel Says

Jeremy Siegel, professor emeritus of finance at the Wharton School of the University of Pennsylvania, who spoke Wednesday at a conference hosted by the CFA Institute about one hour before the Federal Reserve Open Market Committee announced its decision to again raise interest rates, expressed sharp disapproval of Chairman Jerome Powell’s leadership.

The Fed raised the federal funds rate by another 25 basis points and reiterated its commitment to reducing inflation to 2%. The decision was unanimous and is the 10th such raise since March 2022.

Siegel said the Fed has already raised rates too high and that he thinks the latest hike is also regrettable: “The Fed is tightening way too much, given that inflation has come down.”

Although he said he expects Wednesday’s to be the last rate increase, the series of rate hikes is not justified by admittedly high inflation and will likely lead to a mild recession, according to the Wharton professor emeritus. When Siegel said, “I am not thrilled with Chairman Powell,” he drew applause from the CFA audience.

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Siegel then pivoted to what investors can do while dealing with high inflation and the Fed’s monetary policy. Above all else, Siegel emphasized the superiority of stocks as a long-term investment.

“Stocks are the perfect hedge against inflation,” Siegel explained. Stocks have consistently outperformed bonds, gold and other assets over a long time horizon, he said.

Despite Siegel’s confidence, the major stock indexes were largely down between 0.50% and 0.80% following the Fed’s announcement.

Siegel later acknowledged that equity real estate investment trusts and some high-yield bonds can come close to stocks in terms of long-term returns and said the only bonds he has ever invested in for the long term came in a high-yield junk bond fund managed by Vanguard, though he did not specify the precise fund.

As a final thought, Siegel shared his views on the ongoing standoff over the federal debt ceiling. He said “there will not be a default on the debt” and compared it to a “game of chicken.” Though when playing chicken, it is not unheard of for the cars to smash together if neither swerves out of the way.

Perhaps a bit nihilistically, Siegel also said that if the federal government comes close to a default, it will be “a good time to buy” stocks and treasuries especially, since other investors will be selling in anticipation of a crisis that ultimately does not take place.

Tags: Bonds, debt ceiling, Federal Reserve, Stocks

These are dark days for cryptocurrencies, with a string of bankruptcy filings, lawsuits and investigations, not to mention the federal indictment of one-time crypto mogul Sam Bankman-Fried.

But the second largest crypto exchange by volume, embattled Coinbase, is still looking at expansion, even though it is dogged by numerous problems from U.S. regulators and depressed crypto prices. The digital bourse’s corporate parent, Coinbase Global Inc., lived up to its name Tuesday by launching an international derivatives exchange. This brings it into competition with the No. 1 crypto exchange, Binance.

Institutional investors generally have crypto exposure, but mainly it is small. One exception was Canadian pension fund Caisse de dépôt et placement du Québec, which last year suffered a 7.9% loss in its fiscal first half, partly due to crypto’s decline.

Coinbase will offer futures outside the U.S. to crypto traders. These are popular vehicles to hedge against losses or speculate on prices of the virtual coins. In the crypto realm, traders prefer permanent futures, which do not expire as conventional futures do, since the permanent futures permit traders to maintain their protection without constantly renewing contracts. The futures are available using up to five times leverage, settling in USD Coin, a stablecoin issued from Circle Internet Financial, a Coinbase partner.

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The company brushes aside its detractors. Speaking at a Milken Institute conference on Tuesday, Emilie Choi, Coinbase’s president and chief operating officer, insisted that the 11-year-old company has surmounted five rough spells for crypto—which she called “crypto winters”—and emerged in good shape. “We made a lot of acquisitions” amid those downturns, she said. In March, Coinbase bought One River Digital Asset Management, a digital asset manager and investment adviser, for an undisclosed sum.

Coinbase had been profitable and enjoyed growing revenue amid the popularity of digital denominations. The company’s 2021 debut on Nasdaq was a huge success, with shares ballooning more than 30% on the first day of trading. Its Super Bowl ad in February 2022 was clearly the most popular (the 60-second spot centered on a sweepstakes for three $1 million prizes, paid in Bitcoin).

The company’s fortunes soured last year with the decline of crypto. Bitcoin, from its November 2021 peak, lost some 80% of its value over the following 12 months. Lately, it has recovered to a degree but remains 56% below its apex.

Coinbase stock is down to one-seventh of its late-2021 value and has not perked up. Revenue has plunged. The company reported a net loss of more than $1 billion in last year’s second quarter. Red ink has dogged it ever since, and Wall Street estimates show it losing money when it reports earnings on Thursday. In fact, projections are that it will remain unprofitable through at least next year.

Meanwhile, Coinbase has come under federal investigation. The Securities and Exchange Commission has served it with a Wells Notice, informing the company that its business practices were under scrutiny. At the moment, exactly what the SEC is looking for is not clear. Coinbase responded that the enforcement action would “fail on its merits.”