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GameStop mania: many losers to come when it goes back to fundamentals

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Yahoo Finance’s Myles Udland, Julie Hyman, and Brian Sozzi discuss this week’s market volatility with Jeremy Siegel, Wharton School of Business Professor.

Video Transcript

[MUSIC PLAYING]

MYLES UDLAND: All right, welcome back to "Yahoo Finance Live." On this Friday morning, Myles Udland here in New York. We're about three minutes away from the opening bell on this final day of trading on what has been a wild week here on Wall Street. Futures right now indicating a lower open for all three major averages, but with month end and, you know, a huge amount of options expiring today, certainly set to be a wild ride throughout today's seven and a half hour trading session.

Let's stay on the markets and talk a bit about everything that's gone on, what it means, what it doesn't. We're joined now for that conversation by Jeremy Siegel. He's the Russell E Palmer Professor of Finance at the Wharton School at the University of Pennsylvania. Professor Siegel, thank you so much for joining the show this morning. I'd love to begin by just asking, what do you make of the action that we've seen this week, and how are you making sense of what the modern market really is, kind of given this behavior we're seeing?

JEREMY SIEGEL: Yeah, I've never seen anything like this. There have been historical incidents of short squeezes. I mean, there have been short squeezes that go back centuries. Jay Gould shorted and squeezed the gold market back in the 19th century. Piggly Wiggly had a stock that squeezed back in the '20s. So there have been cases squeezed, but, you know, GameStop, a totally ignored type of company that could generate this sort of volume, I think has no precedence.

JULIE HYMAN: Jeremy, how do you see this situation as part of this narrative that's emerged as sort of revenge for the financial crisis in a way or revenge on the part of the little guy for having a system that is not stacked in his or her favor? I mean, I guess we should point out there are probably some hedge funds now who are trading right alongside those people now too. But do you think that that is sort of a valid narrative?

JEREMY SIEGEL: No, I honestly don't. I doubt that narrative. I mean, these chat rooms were designed to talk up stocks. I mean, it's not a pump and dump like the old penny stocks, but you know, you start talking them up. I mean, some of the stocks, you know, weeks and months ago did have a promise that certainly we're talking about the electric vehicle stocks, some of the battery stocks. They may have gotten too high, but they had promise.

I think a lot of this "we're getting revenge" is trying to wrap themselves in a kind of a wrapper of, you know, being justified in going after these guys. Honestly, I think the motive is making money, and there's going to be-- a lot of people have made money. I mean, you take a look at GameStop, it's not quite at its high, but near its high. But there's going to be an awful lot of people that are going to be losing money. There's just no question about that.

BRIAN SOZZI: Yeah, Professor, let's talk about that. Do you think ultimately the Reddit investors, that this will end bad for them?

JEREMY SIEGEL: I think that those that are in it now are generally going to lose. Not saying it might go a little higher, you got to be very nimble. But we know the fundamental value is much lower. And once this mania, and all manias die out, it's going to go back to fundamental value, and you're going to lose.

So you know, right now, it's sort of the greater fool's theory. You know, I mean, I know it's not worth this, but I know there's someone else that's more foolish that's going to buy it from me at a higher price, and I'm smart enough to be able to get out in time. But obviously, there's a lot of people going to be holding the bag here at the end, and they're going to be the losers.

BRIAN SOZZI: Well said, and there we have the opening bell on Wall Street to kick off this Friday trading session. Professor, earlier, coming into January, I caught one of your interviews, and you really made an interesting call. To me, it sounded as though you were calling a short term market top, which right now, that calls working out pretty well. What's your read on the market in light of all this frenzied activity, and do you still see Dow 35,000 this year?

JEREMY SIEGEL: Yeah, I mean, I still think, I'm very bullish on the market. I think all this liquidity is unprecedented. I've gone back through historical records on money, and there's just nothing that compares the amount of liquidity that has been added this year, and liquidity goes into assets and goes into the economy. We're going to have a boom year. I think stocks could definitely have another 20% this year. Then you got to be careful. We're pretty fully valued, but in the meantime, people are going to be chasing real assets. I think inflation is going to be higher than anyone expects, and you don't want to be in bonds. Fixed income is going to be really the out asset in 2021.

MYLES UDLAND: And you know, Professor, thinking a little bit more about some of the market structure oddities that I think this episode has revealed, you know, the move into ETFs into passively managed investments, how big of a role does that play in making stocks that seem liquid, there is a lot of volume in the stock, but the liquidity isn't what it might seem? It doesn't take that much money to move a stock because it's mostly passive flows into most of these names. I mean, how is that influencing, in your view, what we're seeing today?

JEREMY SIEGEL: I don't think that's a big, you know, issue with GameStop. I don't think it with AMC, or there was a little run on American Airlines, one of the bigger ones. You know, we've had some penny, you know, stocks less than a penny. Those are really individual stocks. I mean, a couple of them are in some of the ETFs, but these are really, this is not an ETF issue.

I think this is an issue of running individual stocks, getting in at the bottom, and you know, and there's fantastic profits here for many right now. I mean, you know, it may very well go higher than this, but we know at the end, GameStop is just not worth this amount of money, and it's not like Tesla where you can envision, you know, Tesla being worth a trillion or more. I see no way to envision GameStop being worse with anything like this, and I know that history tells you always that you're going to go back to that fundamental value.

JULIE HYMAN: Professor Siegel, you happen to be the second academic we've talked to today, and so I'm curious about your interactions with students on all of these issues. I mean, you're talking about kids who are coming of age where they really, since they've been cognizant, they have not seen a down market, right?

JEREMY SIEGEL: Yes.

JULIE HYMAN: And I wonder if that combined with this situation, are they hearing your lesson that you were just communicating about fundamental value, or are they hearing the lesson of the Reddit trader right now?

JEREMY SIEGEL: Now, well, you're asking absolutely the right question. And I mean, I like the fact that we have people that are getting excited about what the market can do. I am worried that all the losers, which I know are going to be on bottom [? in, ?] are they going to be turned off forever on the market, or is this going to be a lesson? Listen, you know, this got me interested.

You know, I made some mistakes, lost some money, and now I want to really be a true investor. That's what I'm hoping for. We're going to just have to see how that plays out that they're going to turn to. Listen, everyone that wants, you should have most of your money in sound investments. If you want to have 20% that you want to play with on Reddit, you know, on any of these platforms, you know, all the power to you. Do that.

You know, it's online gambling. It's sports betting. It's fun. You'll learn, you know, something, but you know, the bulk of your investment, you know, start building it up, because that's where your wealth is going to end up when you get older and you're really thinking about what you're going to do when you get to be my age and retire. So a little bit of money in playing around like this, but please don't put 100% of all your money in this, because I think that for, you know, 95% of these investors, they're going to be losers off of these stocks.

MYLES UDLAND: All right, I think a sober lesson and a correct lesson on this frenzied morning. Jeremy Siegel, Professor at Wharton School at the University of Pennsylvania. Professor, thank you so much for your time this morning. Really appreciate it.

JEREMY SIEGEL: Thanks for having me.