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Jeremy Siegel's 2009 Forecast

Written By Brian Hicks

Posted January 23, 2009

The "Wizard of Wharton," Dr. Jeremy Siegel, says the U.S. isn’t headed for another Great Depression…

That’s good to hear, of course. But it’s even more important to believe.

A new study from economists at the University of California and nearby Stanford University points out how indelible the imprint of economic hardship can be on the brain.

The researchers, Ulrike Malmendier and Stefan Nagel, show three main effects of investment disasters on people who came of age in periods of major money troubles:

  • Heightened opposition to risk in stocks
  • Higher sensitivity to inflation and its effects
  • And a longer memory of bad times than good

If you or someone you know endured the Depression, the study’s results are no surprise.

Heck, my grandfather’s Depression-era habits like saving grease and turning off lights carried through all the way to my day. 

He thought of money like it was a cat that could claw at any second, so he bought only bonds and didn’t take risk.

Now, all of us who are witness to the subprime disaster can expect to be a little jittery in the future when it comes to houses, financial stocks, and credit.

But as much as your financial mind may focus on the negative, please try to remember that historical perspective can be positive, too.

Jeremy Siegel Forecasts More Pain, but No Depression

Even though the West Coast research of Malmendier and Nagel suggests you may need a shrink as much as your stockbroker in coming years, University of Pennsylvania investing guru Jeremy Siegel remains calm.

Known as the "Wizard of Wharton" for his long career at the top business school in the country, Jeremy Siegel has written books like Future for Investors, and Stocks for the Long Run.

These titles betray Siegel’s sustained faith in the ability of equities to deliver superior returns to bonds or cash over time…

But rest assured, Siegel hasn’t blinded himself to today’s realities.

On the government’s Troubled Asset Relief Program, whose second stage of $350 billion in taxpayer funds was relesased to the Obama Administration, the good professor says:

"I’m not optimistic about this [second half of the] TARP money. Clearly, the first half didn’t seem to help."

He also foresees further downside for home prices, something my colleague Ian Cooper has pointed out time and time again to guide his successful financial sector options trades.

"The price of homes has to fall," Siegel says, despite 30%-50% losses already seen in some U.S. regions… "There’s no way to stop that from happening."

It’s true. There are further value slumps to come. Steve Christ pointed out in the January 22 Wealth Daily that we are now tiptoeing on the Dow 8000 support level. That technical level seems about as fragile as pond ice on a 33-degree day right now…

Coming back to Jeremy Siegel, though, we get both an international and a historical comparison to consider.

Referring to Japan’s dizzying market drop in the 90s, which gutted that country’s banking system but did not turn into a depression, Siegel says we’re doing better.

"Given that we’re reacting faster than Japan, I think you can make a good inference that [a depression is] not going to happen here."

I didn’t have to bear through the Depression itself, so maybe I’m a glass half-full type of guy when it comes to investing—Siegel’s words do soothe me a bit, cueing that we will avoid the worst-case scenario.

GDP will shrink, more jobs will be lost, and home values may not find a floor nationwide for a while…

That’s exactly why options are the best way to go, until a real bull market lets you go long without getting sick to your stomach.

Ian Cooper’s Options Trading Pit subscribers get advice every day on how to make money here and now. You may not forget losses you’ve had to eat in this or other downturns, but you’ll feel a lot better knowing that with his trades you have potential for gains upwards of 100%.

Need proof? Well, Ian’s 32-for-40 in gains on recent trades, even in this market. 

And since so many are on the sidelines now, you can bet that those who have the resolve to keep making money in this bear market will be the envy of all the fairweather bulls that pop out later—once the recession is declared over.

By that time, you will have logged your outsized gains.

This time, put history on your side with Options Trading Pit.



Sam Hopkins
International Editor
Wealth Daily