Welcome to Zing Talk, where Benzinga brings you the biggest names and brightest minds from Silicon Valley to New York City.

I'm Matt Boesler and joining us today is Vitaliy Katsenelson, Chief Investment Officer at Investment Management Associates, and author of the brand-new book, The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere.

How you doin' today?

Vitaliy Katsenelson: I'm doing great, thank you.

In your book, your thesis is that we're not in a bull market, we're not in a bear market, but we're in a sideways market right now. Can you give us an idea of what exactly you're referring to when you describe the sideways market?

Vitaliy Katsenelson:Think about it this way. When you own stocks in the long run – not days but months, years – stock returns can be explained by looking at two variables: basically their earnings are growing or contracting, and or price-earning is going up or going down.

So let me put it this way: over last 100+ years, if price-earnings always stayed at 15 times earnings, which is about the average, and then basically you would have no market cycles and stocks would go up five, six percent a year. You'd have no bull or bear markets or sideways market. Stocks would just be going up, little by little, every single year.

What happens, however, investors get over optimistic. The price-earnings goes to above-average levels – it goes to maybe 20, 25, 30. When the price-earnings goes up, that's when you start to see higher returns than the average instead of receiving 10, 12, 15 on returns. And that's when you have bull markets.

However, when the price-earnings gets very high, the same human emotion that took the price-earnings upwards, the greed, [which] took it above 15%, here it takes it below 15. What happens in sideways markets, the price-earnings are declining and earnings are growing. Therefore you have basically these two forces working against each other, and markets will go sideways.

When I'm making an argument about sideways markets, there's an explicit assumption that we're going to have earnings growth in the economy over the next decade. If you don't have earnings growth, then this is the case when you have a secular bear market. Think about what happened in Japan from 1990 to today.

In the book you say that the current sideways market has all the makings in place to be the longest in modern history. Why is that?

Vitaliy Katsenelson:If you look historically, this sideways market started at the highest valuation ever. The reason I'm saying it's going to last longer is because the sideways market is determined by two factors: starting valuation, ending valuation, and the rate of earnings totaled.

So my point is this: you go from 30 times earnings to 10 or 12. I don't know. The earnings growth is what's gonna take us there. I would argue today that earnings growth for the economy will be below what it was in the past 10 years. Consumers are deleveraging. Governments, right now they're leveraging up a little bit, but then they'll be deleveraged at some point.

In terms of the market's price-earnings ratio, we're still in for quite a bit of compression, correct?

Vitaliy Katsenelson:This is not a simple discussion. If you look at the forward earnings for the stock market it doesn't look that expensive. However, the market only traded 16 times earnings if those earnings will come through. My argument is that the corporate profit margins today are making multi-decade high again. The high corporate profit margins are not sustainable in the long run, because if one company becomes too profitable, it invites competitors to come in and compete those profits away. So the true valuation is higher than 16 times, it's probably closer to 18, 19 times.

Historically, the P/E went from one extreme to the other. So what's likely to happen is [it] will go below 15 and stay there for quite some time.

If you look at the last sideways market (from '66 to '82), P/E spent half the time below 15 times. So I don't think the world market is cheap. There are some attractive stocks there, but the overall market is not cheap.

Alcoa Inc. (NYSE: AA) reported recently with strong results. Should we expect to continue to see the continued strong earnings growth we've seen over U.S. equities over the last couple of quarters, and if so, what does this mean for the sideways market?

Vitaliy Katsenelson:If you look at the expectations that the S&P 500 is gonna earn $75 this year. The problem is the earnings growth is taking place when you have very high unemployment. A lot of the growth comes from the fact that companies are cutting costs. Then they were laying off people, and they're not hiring people back yet. I have no idea what this quarter is going to be like or what next quarter is going to be like.

We're talking about earnings growth and valuation. What are people missing here?

Vitaliy Katsenelson:It's difficult to analyze the true health of the economy because we have a tremendous amount of government intervention. The government has spent trillions of dollars on stimulus [packages]. Now [they're] interfering with the long-term rates by buying long-term bonds. Short-term rates are at zero.

Here's my analogy. You have an athlete who ran. She fell, broke her ribs, but she keeps running. So you inject a huge amount of steroids into this athlete. If you look at her, she seems to be doing all right. If you look at her vital stats, she's at the top of her game. The only problem is, you don't actually know if it's the steroids at work or if she's a true performer.

My point is that there is so much government intervention with the economy today – so much stimulus – that it is difficult to judge the true performance of the economy. And the reason for that is if it's the steroids at work, it's not a sustainable performance. Steroids are not a long-term fix. They are a very short-term fix.

As they wear out, as the stimulus ends, basically the economy will come back to its true performance. I'm trying to find out what that is.

What do you expect the dangers will be in terms of the current round of quantitative easing? What do you perceive happening as a result of that?

Vitaliy Katsenelson:Historically, the Federal Reserve has controlled the short-term side of the U-curve. What they're doing today, they're trying to lower long-term rates. They're basically trying to take people who didn't want to take risks take risks. They want to take long-term bonds to 3% or 2%.

Basically, they're gonna hurt people. The reason they do it is because they're trying to create asset volumes of bonds, stocks, real estate. But that would be artificial inflation of assets, which at some point will burst. The problem is that, by doing this, they may also destroy the value of the dollar. If they do that, it means we will get inflation in the places they didn't want to get inflation, like commodities. So I think this policy is very dangerous, and I think as an investor you have to try to control the urge to speculate.