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Vanguard's Joe Davis Discusses Global Economics (Podcast) · Masters in Business

• 0:02
  Speaker 1: This is Masters in Business with Verry Ridholts on Boomberg Radio.
• 0:09
  Speaker 1: This week on the podcast, I have an extra special guest.
• 0:12
  Speaker 1: His name is Joe Davis. He is the chief economist
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  Speaker 1: and global head of Investment Strategy at the giant five
• 0:20
  Speaker 1: trillion dollar Vanguard Group. If you are at all interested
• 0:25
  Speaker 1: in a very non traditional economic discussion, then you're gonna
• 0:30
  Speaker 1: find this conversation fascinating. We talk about global trade, but
• 0:35
  Speaker 1: not who's selling what and what tariffs are in the way.
• 0:38
  Speaker 1: We talk about the trade in ideas and the global
• 0:42
  Speaker 1: exchange of technology and how things like the Internet have
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  Speaker 1: allowed the entire world to become richer, more productive, lowering
• 0:55
  Speaker 1: certain um negative aspects of economic growth, and really helping
• 1:01
  Speaker 1: to raise up the entire world economy and world standard
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  Speaker 1: of living. This is a fascinating, wonky conversation that I
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  Speaker 1: think you will find absolutely intriguing. So, with no further ado,
• 1:15
  Speaker 1: my conversation with the Vanguard Groups Joe Davis. My special
• 1:23
  Speaker 1: guest this week is Joe Davis. He is a principal
• 1:27
  Speaker 1: at Vanguard and is the firm's chief economist as well
• 1:31
  Speaker 1: as the global head of the Vanguard Investment Strategy Group.
• 1:35
  Speaker 1: He's also a member of the senior portfolio management team
• 1:39
  Speaker 1: up for Vanguard's fixed income group. Joe Davis, Welcome to Bloomberg.
• 1:44
  Speaker 1: Thanks Barry here. So I've been looking forward to having
• 1:47
  Speaker 1: this conversation with you because there are so many things
• 1:50
  Speaker 1: I want to go over with you about the state
• 1:54
  Speaker 1: of the economy and indexing and Vanguard. Tell us how
• 1:58
  Speaker 1: you found your way to Vanguard. It turns out you
• 2:01
  Speaker 1: were born very close to the Vanguard headquarters, so I
• 2:05
  Speaker 1: grew up literally ten minutes from Vanguard's building. I never
• 2:09
  Speaker 1: thought I would end up working at Vanguard. Uh, Like
• 2:12
  Speaker 1: a lot of things in life, I have my parents
• 2:13
  Speaker 1: the think for why I'm actually at Vanguard. So I'm
• 2:16
  Speaker 1: coming out of grad school do my own job search.
• 2:18
  Speaker 1: You know, I'm thirty one years old, So of course
• 2:20
  Speaker 1: I thought I knew everything, and you went to grad
• 2:22
  Speaker 1: school and duke okay, So I really wanted to go
• 2:25
  Speaker 1: to the private sector, not in academia. And I thought
• 2:28
  Speaker 1: I was going up to to New York City to
• 2:31
  Speaker 1: work on the South Side, And my dad pulls me
• 2:34
  Speaker 1: aside and says, hey, have you ever thought about applying
• 2:36
  Speaker 1: to to Vanguard. So, of course, again, I'm thirty one
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  Speaker 1: I say, what Vanguard, that index company? They don't need
• 2:42
  Speaker 1: an economists and uh, he says, well, do you mind
• 2:44
  Speaker 1: if I take you your resume and give it to
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  Speaker 1: someone over there, And turns out they were just starting
• 2:49
  Speaker 1: a research group to supplement uh Jack Bogel, who was
• 2:54
  Speaker 1: obviously continued to be a luminary in the field, and
• 2:58
  Speaker 1: uh I was. And so next you know, I'm interviewing
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  Speaker 1: a Vanguard's two thousand and two, and uh I was
• 3:03
  Speaker 1: to this day. I was impressed with the talent of
• 3:07
  Speaker 1: the professionals. I'm at a Vanguard with with with no
• 3:09
  Speaker 1: egos and s And that's then. That's over fifteen years ago, Barry.
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  Speaker 1: That's quite intriguing. So as I was preparing some standard
• 3:17
  Speaker 1: economic questions to talk to you about the Federal Reserve
• 3:20
  Speaker 1: and the yield curve and everybody's favorite indicators, I came
• 3:23
  Speaker 1: across a conversation that you had recently where your thirteen
• 3:28
  Speaker 1: year old daughter asked you the question, Hey, Dad, is
• 3:32
  Speaker 1: the world getting any better? That's kind of fascinating from
• 3:35
  Speaker 1: a thirteen year old. But my question for you is
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  Speaker 1: what was your answer? Well, you know what, my my
• 3:41
  Speaker 1: instinct was. It depends and that's of course that's not
• 3:45
  Speaker 1: that's not satisfactory, UM, but his standard economic response. You know,
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  Speaker 1: my my daughter really got me thinking. I remember sitting
• 3:51
  Speaker 1: in the kitchen table Barry, and I said to myself,
• 3:53
  Speaker 1: you know, I should know the answer to this question
• 3:55
  Speaker 1: pretty quickly, and I'm gonna fail seventh grade because that
• 3:59
  Speaker 1: was the question to a seven great essay. UM that
• 4:01
  Speaker 1: end up becoming a whole research project because we're I
• 4:05
  Speaker 1: zeroed in on, uh, is if the world's getting if
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  Speaker 1: the world is going to get better, that means the
• 4:11
  Speaker 1: rate of innovation what we call the rate of productivity,
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  Speaker 1: has to has to accelerate. And why anyone should care
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  Speaker 1: about that is because then the standard of living for
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  Speaker 1: people around the world's increasing. And we had that that
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  Speaker 1: rate of increase has been declining since two thousand, long
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  Speaker 1: before the global financial crisis. And and so we stumbled on,
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  Speaker 1: you know, what is going to lead to higher rates
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  Speaker 1: of growth? Innovation for you know, more inclusive growth across
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  Speaker 1: the world, and something we didn't inspect the find we
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  Speaker 1: actually we believe we found what potentially is the first
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  Speaker 1: leading indicator for innovation that suggests just right now that
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  Speaker 1: innovation may and growth may accelerate five or six years
• 4:50
  Speaker 1: in the future. So Stephen Pinker, linguists at Harvard wrote
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  Speaker 1: a book, The Bitter Angels of Our Nature, and his
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  Speaker 1: takeaway was, well, the headlines are just worse and worse.
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  Speaker 1: But if you put aside the headlines and actually look
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  Speaker 1: at the data, UH, infant mortality, UM, nutritional UM, lack
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  Speaker 1: of nutrition and starvation, UH, capital crimes, war, UM. All
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  Speaker 1: these things have been going down. I've been going down
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  Speaker 1: for fifty years on a global basis. Why is it
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  Speaker 1: that that is such a challenging question. Why does it
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  Speaker 1: not feel like things are getting better when they clearly
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  Speaker 1: are getting better everywhere? And I remember routing off some
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  Speaker 1: of those statistics, uh, you know to my daughter, Um,
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  Speaker 1: you know Steve's book. Hans Rosling for years also talked
• 5:38
  Speaker 1: about that great, great example. UM. I think part of
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  Speaker 1: it is that those are slow moving trends, so we
• 5:43
  Speaker 1: just don't fixate on them because they're not moving up
• 5:46
  Speaker 1: and down very quickly. Um. Those are years and yeah,
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  Speaker 1: years and decades. The other thing is, I I listen,
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  Speaker 1: I I can't prove this beare I think part of
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  Speaker 1: this is happiness is relative in life, Right, there's a
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  Speaker 1: lot of well rout it depends the relative to you know,
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  Speaker 1: so it's out to your people. I think you can
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  Speaker 1: explain the paradox have said, you have, you know, general
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  Speaker 1: trends in the world. A lot of trends are better,
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  Speaker 1: lower violence, UH, increased wealth around the world. Look what's
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  Speaker 1: happened in China. Yeah, you have rise in income inequality.
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  Speaker 1: So that's where you can you can you can. I
• 6:15
  Speaker 1: think you can reconcile with some of this paradox by
• 6:17
  Speaker 1: saying that's where the relative matters as much as the absolute.
• 6:20
  Speaker 1: I don't that's what I justify that position, but I
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  Speaker 1: think that has been lost sighted. But the fact is,
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  Speaker 1: I think in the financial markets and as investors, we
• 6:28
  Speaker 1: focus more on UH corporate earnings growth those economic fundamentals
• 6:33
  Speaker 1: that perhaps me fall outside of GDP. So let's talk
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  Speaker 1: about the productivity issue that you you mentioned. I so
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  Speaker 1: I work in a space where productivity has been exploding
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  Speaker 1: and so on a relative basis To answer to respond
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  Speaker 1: to what you said earlier, it seems to me like
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  Speaker 1: productivity growth is booming. Why do we not see productivity
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  Speaker 1: growth throughout the whole economy? And is that a measurement
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  Speaker 1: issue or is it a genuine lack of productivity problem. Yeah,
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  Speaker 1: I think that there's there's three potential reasons why. And
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  Speaker 1: again we should care because if proactivity is really going
• 7:10
  Speaker 1: to return, Bob Gordon's got that great book, The Rise
• 7:13
  Speaker 1: and Fall of American Growth, And you know, other than
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  Speaker 1: the late nineties, we haven't seen a material pick up
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  Speaker 1: in in proactivity. And again it feels all around us
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  Speaker 1: very right, I mean, technological disruption, innovation, technology. It seems
• 7:25
  Speaker 1: like you should be there. So when it could be mismeasured,
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  Speaker 1: I don't buy that argument. We've looked at some of it.
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  Speaker 1: If it's mismeasured, it's second order. I mean GDP and
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  Speaker 1: those short of statistics have always been mismeasured. Um. And
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  Speaker 1: I've done a lot of economic historical work to to
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  Speaker 1: to just you know, to to justify that that that position. Secondly, um,
• 7:43
  Speaker 1: is that it's were permanently. There's some making the argument,
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  Speaker 1: some really smart people that I respect, making the argument.
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  Speaker 1: I mean, you hear it in phrases of secular stagnation.
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  Speaker 1: You hear it. Of all, ideas are harder to come by,
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  Speaker 1: that that proactivity is permanently impaired. I don't buy that either.
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  Speaker 1: The third one is I believe that um, that there's
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  Speaker 1: an implementation phase that that the global economy is working
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  Speaker 1: through again demographics acide. I'm talking about output per person,
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  Speaker 1: income per person um that we will see material rise
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  Speaker 1: in productivity. I can't tell you that the day or
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  Speaker 1: the week, Barry, but our our work some what we've
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  Speaker 1: done we can get into. We call the idea multiplier.
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  Speaker 1: We believe is the world's first leading indicator of commercial
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  Speaker 1: innovation that actually will show up on statistics. And we
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  Speaker 1: believe that that is in the process of occurring, um.
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  Speaker 1: But it's going to take a little bit of time.
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  Speaker 1: And again that there's an historical analogy to this. In
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  Speaker 1: the past two periods in long u s history over
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  Speaker 1: two years, there was two periods in time at least
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  Speaker 1: when productivity is as low as it is today, in
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  Speaker 1: a period of profound technological disruption. It happened during the
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  Speaker 1: mid nineteenth century when steam engines and locomotives were explaining
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  Speaker 1: across the economy. But there was a ten of fifteen
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  Speaker 1: year period after a financial crisis, ironically, when when growth
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  Speaker 1: and productivity was at a standstill, and yet investment in
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  Speaker 1: new technology was starting to pick up. So how much
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  Speaker 1: of an impact does the financial crisis have on either
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  Speaker 1: actual innovation or the measurement of innovation in the following decade. Well,
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  Speaker 1: I believe in in in some of the work we've
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  Speaker 1: done shows that most industrial revolutions, we can debate whether
• 9:23
  Speaker 1: there's been two, three, or four UM, they generally have
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  Speaker 1: two broad phases. The first one is the first u
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  Speaker 1: fouria that can last ten or twenty years. That's when
• 9:31
  Speaker 1: the first technology that the general purpose technology, steam engine, electricity,
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  Speaker 1: the computer, when it's it's it's it's built and it's
• 9:39
  Speaker 1: introduced to the marketplace, think of routers and and and
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  Speaker 1: hardware in the late nineties. That's the first phase. That
• 9:46
  Speaker 1: typically then happens a period of euphoria with that financial bubbles,
• 9:50
  Speaker 1: there's economic damage. UM. What I think is lost though
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  Speaker 1: the more powerful phases the second phase, because what general
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  Speaker 1: purpose technology changes the world when it changes business models
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  Speaker 1: and it changes how companies do things that have nothing
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  Speaker 1: to do with the original technology. And that's where UM
• 10:09
  Speaker 1: some call it now AI artificial intelligence. It's just effectively
• 10:13
  Speaker 1: computer software at a more advanced pace, that is the
• 10:16
  Speaker 1: more profound pace. And I think we're starting to enter
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  Speaker 1: that UM and so that's where we will see the
• 10:22
  Speaker 1: productivity gains is is all the other occupations and industries
• 10:26
  Speaker 1: across the country using that sort of computer technology. Quite fascinating. Uh,
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  Speaker 1: Let's talk a little bit about innovation and creativity. Following
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  Speaker 1: the dot com bust, you began hunting for a formula
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  Speaker 1: to determine what it is that drives innovation in the
• 10:44
  Speaker 1: world as well as human creativity. You called it the
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  Speaker 1: ideas multiplier. To discuss that research, Well, we were, you know,
• 10:52
  Speaker 1: we we were trying to answer the fundamental question Barry.
• 10:55
  Speaker 1: And again we've we've we fully answered it, but we
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  Speaker 1: I think we have better insight into explaining this paradocks
• 11:00
  Speaker 1: in the world low productivity and measure rates of innovation. Yeah,
• 11:03
  Speaker 1: we got technological disruption all around us. And where our
• 11:07
  Speaker 1: research lead us is to say what ultimately leads to uh,
• 11:11
  Speaker 1: profound increases in economic growth, whether it's in China the US,
• 11:15
  Speaker 1: it's that genuine rate of innovation, right, And and what
• 11:18
  Speaker 1: we did is we looked at say, well, if if
• 11:21
  Speaker 1: if prota it's low or high. Ultimately what that means
• 11:25
  Speaker 1: is the the the amount or the number of valuable
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  Speaker 1: ideas being created world. Ideas for a new widget, new computer,
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  Speaker 1: new business model, new product, that has to be the
• 11:36
  Speaker 1: pressed now. Um, and if we can, if we can
• 11:39
  Speaker 1: look at what is occurring in the world and the
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  Speaker 1: globalization the trade of ideas across countries, then we can
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  Speaker 1: get a sense of where the new ideas will come from, if, if,
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  Speaker 1: if at all, if it will they'll accelerate. So so
• 11:51
  Speaker 1: let me try to unpack that a little bit, because
• 11:53
  Speaker 1: that's a really loaded multipart observation. First, my assumption has
• 11:59
  Speaker 1: always been and new ideas bubble up constantly, and while
• 12:04
  Speaker 1: we may not know if it's coming from Boston or
• 12:06
  Speaker 1: San Francisco or New Delhi or Beijing, human ingenuity is
• 12:12
  Speaker 1: constantly trying new things and putting different things together. But
• 12:15
  Speaker 1: what you're implying is new ideas EBB and flow in
• 12:20
  Speaker 1: a cycle of sorts. Yeah, I mean, even it's a
• 12:24
  Speaker 1: fashionating there's like long waves. Now, you can smooth any
• 12:27
  Speaker 1: time series and you can find this but long raise
• 12:29
  Speaker 1: of innovation through time. In fact, in the United States,
• 12:32
  Speaker 1: we've had at least nine periods when productivity on a
• 12:34
  Speaker 1: ten year basis has been zero really ten you now,
• 12:38
  Speaker 1: just because it's it's been zero nine previous times. Doesn't
• 12:41
  Speaker 1: mean we're gonna rebound out of this one, because that's
• 12:43
  Speaker 1: where we're at in the previous ten years. Zero. Now,
• 12:46
  Speaker 1: when you say zero productivity on a trailing basis right on,
• 12:50
  Speaker 1: I'm talking to trend forget that. So what happens is
• 12:52
  Speaker 1: there's a giant drop in productivity because of all the
• 12:55
  Speaker 1: job to myself included, you know I did to Going
• 12:58
  Speaker 1: back to my daughter's question, I have a good answer
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  Speaker 1: because economists generally treat the productivity as a residual, meaning
• 13:04
  Speaker 1: we don't really know what what why it goes up
• 13:07
  Speaker 1: and down through time because ultimately it leads to where
• 13:10
  Speaker 1: our new ideas coming from. So how do you how
• 13:12
  Speaker 1: do you answer where new ideas are coming from? So
• 13:15
  Speaker 1: what we started looking at is what drives when the
• 13:18
  Speaker 1: rates of idea creation accelerate and decelerate through time. And
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  Speaker 1: what we did is is we actually we actually traced
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  Speaker 1: the creation of every valuable idea in the world over
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  Speaker 1: the past forty years. It was over two billion records.
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  Speaker 1: And what I mean by that is we care not
• 13:34
  Speaker 1: just by about some idea being created, because there's a
• 13:36
  Speaker 1: lot of quite frank, a lot of bad ideas. We
• 13:39
  Speaker 1: want to care about. Can we trace the spawning and
• 13:43
  Speaker 1: spreading of valuable ideas, think of things like the Internet,
• 13:47
  Speaker 1: but things that even are smaller in scale, which create
• 13:49
  Speaker 1: new businesses, new opportunities. And we looked around the world
• 13:53
  Speaker 1: and what we found is actually the most powerful part
• 13:55
  Speaker 1: of globalization, because globalization is on their attack with trade,
• 13:59
  Speaker 1: is the rate of ideas. Right, the fact that there's
• 14:02
  Speaker 1: more knowledge and ideas being created in China, which is
• 14:05
  Speaker 1: actually now leading to further additional ideas in the United
• 14:09
  Speaker 1: States and vice versa. And so what we found is
• 14:13
  Speaker 1: uh that that is what we call the idea multiplier.
• 14:15
  Speaker 1: How many future ideas are created by one good idea
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  Speaker 1: in that ratio was roughly forty two one one. It
• 14:23
  Speaker 1: picked up in it actually told us, had we had
• 14:26
  Speaker 1: the data back, that there was something coming five years
• 14:30
  Speaker 1: later in the computer industry. It was called now the Internet.
• 14:33
  Speaker 1: Because the rate of ideas and being discussed in academia
• 14:36
  Speaker 1: and patent applications in academic research, which is the signals
• 14:40
  Speaker 1: that's where the data we were using two billion records.
• 14:42
  Speaker 1: You could see that sort of high energy state in
• 14:46
  Speaker 1: those fields, and it's been dormant for the past ten years,
• 14:49
  Speaker 1: which I think helps to rectify some of this what
• 14:51
  Speaker 1: some call the new normal is because the rate of
• 14:54
  Speaker 1: new influential ideas commercial ideas has kind of plateaued around
• 14:58
  Speaker 1: twos to one, and you're and you're suggesting that this
• 15:02
  Speaker 1: is cyclical and temporary and down the road. Well, what
• 15:05
  Speaker 1: we just picked up is so the data and we
• 15:07
  Speaker 1: were I was shocked to find. In fact, we had
• 15:09
  Speaker 1: the team crunch at four different times um a lot
• 15:12
  Speaker 1: of that. What we found is now just in the
• 15:14
  Speaker 1: past year, that idea multiplier went from two hundred to
• 15:18
  Speaker 1: one to over four hundred to one. So, in other words,
• 15:21
  Speaker 1: this is now starting to leading indicator that this idea multiplier,
• 15:25
  Speaker 1: when you look at its rate of change, tends to
• 15:27
  Speaker 1: lead actual productivity growth four or five years in the future.
• 15:30
  Speaker 1: I know it sounds crazy, but the ideas that we're
• 15:33
  Speaker 1: tracing in our leading indicator, our ideas in academic research,
• 15:37
  Speaker 1: medical research, it's patent applications and how they're being cited.
• 15:41
  Speaker 1: Every journal and every book that has ever been written
• 15:43
  Speaker 1: over the past forty years. We look at all those ideas,
• 15:46
  Speaker 1: and not only that, all the citations of all that
• 15:48
  Speaker 1: research and what ideas they are citing. And when you
• 15:51
  Speaker 1: look at all that data. You can then identify what
• 15:53
  Speaker 1: are influential ideas that are spreading. And what we found,
• 15:56
  Speaker 1: to my shock, is that there was five fields we've
• 15:59
  Speaker 1: found out that have the higher idea multiplier than what
• 16:02
  Speaker 1: the computer technology industry had. In those five are in order.
• 16:08
  Speaker 1: One is around materials. It may have to do with batteries.
• 16:11
  Speaker 1: It couldn't, So I can't batteries. I can't. I cannot
• 16:14
  Speaker 1: tell you what game changing ideas will occur, but I
• 16:16
  Speaker 1: can we can have some sense of where the fields are.
• 16:19
  Speaker 1: Just just look here in Manhattan. There are now high
• 16:21
  Speaker 1: rises that are these tiny skinny pencil bigger than the
• 16:26
  Speaker 1: Empire State building. The only reason that exists is the
• 16:29
  Speaker 1: technology for the spines of those buildings. It's no longer steel.
• 16:33
  Speaker 1: It's a form of carbon graphite, the carbon file that
• 16:36
  Speaker 1: you can make lighter and smaller and stronger. You couldn't
• 16:40
  Speaker 1: have built that. So I tell my daughters the three
• 16:43
  Speaker 1: leads that, so it's three jumped again. I have a
• 16:45
  Speaker 1: higher idea multiplier today than computers did. Material science, material sciences.
• 16:51
  Speaker 1: One second is that actually I'll give you four second
• 16:54
  Speaker 1: is actually oncology. The funny enough cancer, incredible progress. Um,
• 16:58
  Speaker 1: that's encouraging for my personal So we will be cancer
• 17:01
  Speaker 1: in our lifetime. Is that that I don't know, I
• 17:03
  Speaker 1: don't know, I know, yeah, yeah, I would not say that.
• 17:06
  Speaker 1: The third is actually around agriculture, plant sciences increasing yield,
• 17:12
  Speaker 1: increasing that again we you know we I don't. I'm
• 17:15
  Speaker 1: not good enough or smart to tell you exactly what
• 17:17
  Speaker 1: new product will come out, but there's something big in
• 17:20
  Speaker 1: the pipeline. A few years ago, Monsanto patented the ability
• 17:24
  Speaker 1: to create rice that was salt water resistant. So if
• 17:27
  Speaker 1: you're in parts of let's call India and Pakistan and
• 17:30
  Speaker 1: Malaysia where it's the staple crop, but there are frequent
• 17:33
  Speaker 1: floodings which can destroy regular most crops are sensitive to salt.
• 17:38
  Speaker 1: This is so fascinating. And then the largest one that
• 17:41
  Speaker 1: has by far the highest multiplier is is genetics and
• 17:45
  Speaker 1: genomics research. Really yeah, I mean it's often makes sense,
• 17:48
  Speaker 1: but it's off the chart. I mean, it's it's over
• 17:50
  Speaker 1: two x where computers were again just a you know,
• 17:53
  Speaker 1: relative comparison, because what's an idea multiplier? Again, we're introducing
• 17:56
  Speaker 1: new concepts in this debate. It's effectively you know that
• 17:59
  Speaker 1: that's in gine next and ironically, did you see how
• 18:02
  Speaker 1: I'm I did not mention AI in any of the fields.
• 18:05
  Speaker 1: You did not. That's correct, because what's happening is AI
• 18:09
  Speaker 1: is incredibly important. I'll call it Brawley computer technology, digital technology.
• 18:13
  Speaker 1: They are being used by all these industries. That's a
• 18:15
  Speaker 1: general purpose technology. The ultimate new game change on ideas
• 18:18
  Speaker 1: will come out, I believe from one of those and
• 18:21
  Speaker 1: not more of those fields I just mentioned. But they
• 18:24
  Speaker 1: perhaps could not have come up with some of those
• 18:25
  Speaker 1: answer applications without computer. Probably we probably couldn't perhaps do
• 18:29
  Speaker 1: this podcast without the computer and soft technology that you
• 18:32
  Speaker 1: have today. We could. It would just be two people
• 18:34
  Speaker 1: having a cup of coffee. That's what the technology allows
• 18:37
  Speaker 1: us to do. So I have to ask you a
• 18:39
  Speaker 1: question about one of those titles, Global Head of Vanguard
• 18:43
  Speaker 1: Investment Strategy. What does this group? What does it do?
• 18:47
  Speaker 1: Why does Vanguard have a global head of Investment Strategy?
• 18:50
  Speaker 1: And thanks Perry ultimately thought leadership. So our job, the
• 18:56
  Speaker 1: Investment Strategy Group's job. It's a group in in existence
• 18:58
  Speaker 1: roughly fifteen years. Um, it's actually the group I was
• 19:02
  Speaker 1: hired into. And um, you know, our job is to
• 19:06
  Speaker 1: is to help investors be successful and help them, UH,
• 19:11
  Speaker 1: provide them with the perspective on the problems they're trying
• 19:13
  Speaker 1: to solve. So if it is what is Vanguard think
• 19:15
  Speaker 1: dot dot dot And if the next word or phrases
• 19:19
  Speaker 1: what's our view on the long term trends in the
• 19:21
  Speaker 1: economy and what are reasonable expected returns? That would be
• 19:24
  Speaker 1: Investment Strategy group. If it would be on what are
• 19:27
  Speaker 1: viable retirement income and UH an investor behavior concerns and issues, UH,
• 19:32
  Speaker 1: this would be that group. It would be what's the
• 19:34
  Speaker 1: role of an asset or SEBASTA class factors commodity of
• 19:38
  Speaker 1: what's that role in the portfolio. We would help through
• 19:41
  Speaker 1: research as well as computer analytics UH to help investors
• 19:46
  Speaker 1: or our internal business partners, those that provide advice, those
• 19:49
  Speaker 1: that provide counsel to advisors, institutions, or individual investors. We
• 19:53
  Speaker 1: would help them through the research that we conduct. So
• 19:56
  Speaker 1: we're ultimately a research arm of the company UM, but
• 20:00
  Speaker 1: increasingly doing a lot through computer development as well as
• 20:03
  Speaker 1: speaking the clients UH and prospects on the road. So
• 20:07
  Speaker 1: what I'm not hearing in the list of things that
• 20:09
  Speaker 1: this group does is you're not forecasting the economy. You're
• 20:13
  Speaker 1: not forecasting the market. You're not making recommendations to rotate
• 20:18
  Speaker 1: out of this sector into a different sector. Not unexpected
• 20:23
  Speaker 1: from the Vanguard group. Who what is it about two
• 20:26
  Speaker 1: thirds of the assets of Broadly invest I'll I'll tell
• 20:29
  Speaker 1: you when I when I first came to Vanguard, and
• 20:31
  Speaker 1: I'll never forget the question was why does Vanguard need
• 20:35
  Speaker 1: an economist? It's still a good question I get asked.
• 20:38
  Speaker 1: So I think ultimately because um, for two reasons. One
• 20:43
  Speaker 1: is ultimately, asset allocation, which we all know is the
• 20:45
  Speaker 1: most important decision any investor has to make. Ultimately is
• 20:49
  Speaker 1: a function of the expected returns and volatilities you assume
• 20:53
  Speaker 1: for that portfolio. Now, you can use long run history,
• 20:56
  Speaker 1: but why should you do it? Our themes different? Uh Um. Secondly,
• 21:01
  Speaker 1: so that's important, and so how do you think through
• 21:04
  Speaker 1: forming the sort of viable return and risk expectations. I
• 21:07
  Speaker 1: think the job of our our our team is to
• 21:09
  Speaker 1: help do that in a reasonable way. And secondly is
• 21:12
  Speaker 1: to convey the risk in the marketplace to help investors
• 21:15
  Speaker 1: make decisions on their uncertainty. I'm very proud of our framework.
• 21:18
  Speaker 1: You know, we refuse to release short term point forecast.
• 21:23
  Speaker 1: I we we have a mantra At Vanguard we will
• 21:26
  Speaker 1: shall not produce point forecast. We can produce forecast. I
• 21:29
  Speaker 1: think that's helpful if we show the range of distributions.
• 21:32
  Speaker 1: Our job is too in a very statistical, rigorous way,
• 21:35
  Speaker 1: what is the range of expected returns or outcomes for
• 21:38
  Speaker 1: the markets, for the economy, for the assets that we
• 21:42
  Speaker 1: care about. But that probabilistic approach is very different than
• 21:46
  Speaker 1: so really the question isn't what does Vanguard have an
• 21:51
  Speaker 1: economist the chief economist? Really the question is how is
• 21:55
  Speaker 1: Vanguard's chief economists different from the typical chief economists and
• 22:00
  Speaker 1: its Wall Street firms? Because that's really and I and
• 22:02
  Speaker 1: I respect many of my colleagues, Um, you know, I
• 22:04
  Speaker 1: read their research. I'd say, you know where we where
• 22:08
  Speaker 1: we differ is is in the is in the shift
• 22:10
  Speaker 1: of our horizon and where we focus on so we
• 22:13
  Speaker 1: spend For example, I I tell my team we should
• 22:15
  Speaker 1: not be spending much time trying to divine what the
• 22:18
  Speaker 1: latest GDP number will be. We care about it will
• 22:21
  Speaker 1: give a high level glance, but we care more about
• 22:24
  Speaker 1: investigating longer term trends than such as technology, globalization, demographics, debt.
• 22:30
  Speaker 1: Why we care about that, because that ultimately change alter
• 22:33
  Speaker 1: the trend for growth for short term interest rates, where
• 22:37
  Speaker 1: the building block for all expected returns and the risk
• 22:39
  Speaker 1: premiums you and I hope to harvest over our investment horizon.
• 22:44
  Speaker 1: So um, not to say those other exercise aren't important,
• 22:47
  Speaker 1: but we focus much more in the longer term trends
• 22:49
  Speaker 1: and the risk the development of China. How that's altering
• 22:53
  Speaker 1: the relationship with the US rather than just the data
• 22:56
  Speaker 1: flow as I call day to day, week to week.
• 22:58
  Speaker 1: I I think you economys should not spend as much
• 23:01
  Speaker 1: time as we do at times on on those sort
• 23:04
  Speaker 1: of short term signals. So when you're talking about trends,
• 23:06
  Speaker 1: you're not talking about quarters and years. You're talking about
• 23:10
  Speaker 1: decades long, secular trends that are very sign now to
• 23:14
  Speaker 1: help the you know, to influence. It's just an input
• 23:16
  Speaker 1: to our performid management team on the fixed income side,
• 23:18
  Speaker 1: obviously their active bond managers. Our view on the Federal
• 23:21
  Speaker 1: reserve matters, our view on growth, what's the risk of recession.
• 23:24
  Speaker 1: We will estimate all those We don't tend to publish
• 23:27
  Speaker 1: them in high frequency externally for clients, but it's part
• 23:30
  Speaker 1: of the active management process. But again it's all in
• 23:33
  Speaker 1: that distributional setting not talked to you before, Barry. We're
• 23:36
  Speaker 1: trying to and this is just as hard the one question.
• 23:39
  Speaker 1: One one problem is not easier solve than the others.
• 23:41
  Speaker 1: We're just trying to focus if we can now the
• 23:43
  Speaker 1: sort of trend and have better sense. I'll give you
• 23:45
  Speaker 1: an example. For ten years, we have not been concerned
• 23:48
  Speaker 1: of a rapid increasing core inflation in the U S
• 23:52
  Speaker 1: or an almost any other market. One of the reasons
• 23:54
  Speaker 1: why we looked at the role of technology and how
• 23:56
  Speaker 1: that is depressing. We quantified the role of tech knowledging
• 24:00
  Speaker 1: digital computer is actually probably subtracting fifty basis points a
• 24:03
  Speaker 1: year from core inflation. So that matters because that gets
• 24:06
  Speaker 1: to what are reasonable expectations for the Federal Reserve, what
• 24:09
  Speaker 1: are reasonable expectations for long term tenure or for the
• 24:11
  Speaker 1: tenure Treasury. Again, we will never have a crystal ball.
• 24:14
  Speaker 1: Our job is to say what are the reson what
• 24:16
  Speaker 1: are the factors helping to drive these longer term trends.
• 24:19
  Speaker 1: And I'm proud of you know. That's where our marginal hour,
• 24:23
  Speaker 1: our marginal dollar is spent is trying to get a
• 24:26
  Speaker 1: glean a little bit more inside and as longer terms.
• 24:28
  Speaker 1: So let's stay with the longer term trend with inflation
• 24:32
  Speaker 1: deflationary forces such as UM manufacturing economies of scale coming
• 24:37
  Speaker 1: out of places like China but also India and Turkey
• 24:41
  Speaker 1: and Vietnam and elsewhere. UM. But that's offset from some
• 24:45
  Speaker 1: of the longer term trends on things like education and healthcare,
• 24:49
  Speaker 1: which have been way above average. How do you look
• 24:52
  Speaker 1: at that trend and what does that do to the
• 24:55
  Speaker 1: overall inflation picture and and everything else? So I think
• 24:58
  Speaker 1: two things. One thing that's been in statistically we could
• 25:00
  Speaker 1: you know, I could show you it's irony. One of
• 25:03
  Speaker 1: the reasons why inflation it's although possible, is unlikely to
• 25:07
  Speaker 1: rise maturally in urin eyes lifetime, is because you and
• 25:10
  Speaker 1: I and everyone else in the marketplace believes that it won't.
• 25:14
  Speaker 1: It's inflationd So economists generally talk about anchored inflation expectations
• 25:18
  Speaker 1: really surround us, Like how anchored inflation expectations? Right? It's
• 25:21
  Speaker 1: the tips markets breaking inflation. Central bankers will use well
• 25:25
  Speaker 1: anchored inflation expectations. Really, what this matters is is that
• 25:28
  Speaker 1: we we believe that we believe in the federal reserves
• 25:31
  Speaker 1: credibility and achieving a roughly two percent, and so inflation
• 25:35
  Speaker 1: expectations matter, which means it's less likely to core inflation
• 25:38
  Speaker 1: to go above it or blow it. And now you
• 25:41
  Speaker 1: overlay that with the trends and technology, and we have
• 25:44
  Speaker 1: long believed that generating two percent inflation in a digital
• 25:48
  Speaker 1: world it's just tougher to do. Is it possible? Clearly
• 25:50
  Speaker 1: if you go to Argentina, very easy to get well,
• 25:53
  Speaker 1: but there's a but that's because they have very poor
• 25:56
  Speaker 1: inflation psychology, and so Japan of anything they have yet
• 26:00
  Speaker 1: is this day to break that negative or low inflation psychology.
• 26:04
  Speaker 1: The federal reserves to their credit, and I think Americans
• 26:07
  Speaker 1: as a as a marketplace, we've generally zero didn't on
• 26:10
  Speaker 1: that two So putting aside the hyper inflation in Venezuela
• 26:14
  Speaker 1: and the deflation in Japan. Um, and let's talk about
• 26:19
  Speaker 1: the challenge of reaching two percent in places like Europe
• 26:21
  Speaker 1: in America. What does this tell us about wages going forward?
• 26:26
  Speaker 1: We've had thirty years of fairly flat net of inflation,
• 26:31
  Speaker 1: thirty years of flat real wage gains. What what can
• 26:35
  Speaker 1: workers expect going forward? Well, I think modest, you know,
• 26:38
  Speaker 1: modest increases, which the thing is a positive I think
• 26:41
  Speaker 1: I'm you know, two things I'd say about wages. One
• 26:43
  Speaker 1: is wage growth. Let's say the US example, we are
• 26:46
  Speaker 1: where we should be because at the end of the day,
• 26:48
  Speaker 1: wage growth should be roughly the rate of productivity, which
• 26:51
  Speaker 1: you and I just spoke about today's just kind of
• 26:54
  Speaker 1: kind of low, and inflation which is also called low. Now,
• 26:58
  Speaker 1: I would say that I think way growth will continue
• 27:01
  Speaker 1: to mostly inch higher, and I think it's a positive.
• 27:04
  Speaker 1: And there's always the risk es central banks overreact that
• 27:07
  Speaker 1: will not lead to material rising core inflation. The wages
• 27:11
  Speaker 1: can go up, I think I'll see a lot in
• 27:13
  Speaker 1: the marketplace. Associate if if wages should pick up further,
• 27:15
  Speaker 1: take go from three to four percent, all core inflation
• 27:18
  Speaker 1: defends behind the curve. That's a that's a mistake in
• 27:20
  Speaker 1: our mind because we believe that inflation, not wages inflation
• 27:24
  Speaker 1: are anchored and so uh, you know, we believe the
• 27:27
  Speaker 1: FED won't make necessary that mistake and overtighten in that.
• 27:30
  Speaker 1: So that would be good news, I think, you know,
• 27:32
  Speaker 1: but I think we're going to live in this. There's
• 27:34
  Speaker 1: several paradoxes in the world. One is low growth before employment.
• 27:38
  Speaker 1: Secondly is tight labor markets. Yet low inflation, low growth,
• 27:42
  Speaker 1: full employment, tight labor market, low inflation. But I'm hop
• 27:47
  Speaker 1: so I think we can get from three to three
• 27:49
  Speaker 1: and a half percent wage growth. If we're hoping for
• 27:51
  Speaker 1: much higher wage growth, we need to see that productivity boom,
• 27:55
  Speaker 1: you know, four or five years out, perhaps accelerate earlier
• 27:59
  Speaker 1: for us to more sustained growth. So you're describing a
• 28:02
  Speaker 1: little bit of a Goldilocks scenario as much as do well.
• 28:08
  Speaker 1: But let's let's let's take that apart, because my pal
• 28:11
  Speaker 1: Arry Cudlow would be all over, hey, we have full employment,
• 28:15
  Speaker 1: but no inflation. Wage growth is starting to tick up,
• 28:18
  Speaker 1: but not so much as to force the fence hands.
• 28:21
  Speaker 1: How long can those set of inputs continue into the
• 28:26
  Speaker 1: you know, I think unfortunately, I think it may it
• 28:28
  Speaker 1: may take a recession before we get some sort of
• 28:31
  Speaker 1: you know, the pickup and automation you know, um productivity
• 28:34
  Speaker 1: that I think we started to pick up. Because again,
• 28:36
  Speaker 1: this is a signal that's five years out, believe or not. Um, Listen,
• 28:39
  Speaker 1: I think we're gonna have a period where, you know,
• 28:42
  Speaker 1: to this day, you know, our are guarded return out. Look,
• 28:45
  Speaker 1: we've had that for two or three years. We have
• 28:48
  Speaker 1: we haven't been the only firm. Unfortunately, it may take
• 28:50
  Speaker 1: a bear market to get this to get us out
• 28:52
  Speaker 1: of this low expected return orbit. And that's no pain, no,
• 28:55
  Speaker 1: it's no pain, no game. We were talking about the
• 29:00
  Speaker 1: in a positive environment we've been in with full employment
• 29:04
  Speaker 1: and low inflation and modest wage growth, Which brings us
• 29:09
  Speaker 1: to the question of the Federal Reserve. Given all that,
• 29:12
  Speaker 1: do they need to keep tightening or normalizing interest rates
• 29:16
  Speaker 1: or are they about where they should be? I think
• 29:18
  Speaker 1: there about where they should be. You know, we've had
• 29:20
  Speaker 1: a longstanding view, Barry, in part because of how we diagnosed, um,
• 29:24
  Speaker 1: where inflation was going to go, that the Federal Reserve
• 29:27
  Speaker 1: would be hard pressed to ever get above three percent.
• 29:31
  Speaker 1: And we're not like super bars on the economy, and
• 29:33
  Speaker 1: we'll just start diagnosed with the other trends, and um,
• 29:36
  Speaker 1: we thought four rate hikes and twenty eight team was
• 29:39
  Speaker 1: was likely. I think that because of the vigor of
• 29:41
  Speaker 1: the labor market, we went into the year expecting to
• 29:45
  Speaker 1: rate hikes that would get them just below three percent
• 29:47
  Speaker 1: in that range. We've actually backed off that given the
• 29:50
  Speaker 1: volatility we've seen and so so we we were expecting
• 29:55
  Speaker 1: to when we first published would brings us up to
• 29:57
  Speaker 1: where three yeah, where we're close, and we a it
• 30:00
  Speaker 1: breaks to two and two and three quarters, right, So
• 30:03
  Speaker 1: we're still low by historical standards. But what matters is
• 30:05
  Speaker 1: the real rate, not not the nominal um. I think
• 30:09
  Speaker 1: they're the bias shifts towards them cutting rates, not because
• 30:13
  Speaker 1: they made a mistake per se. But uh, you know,
• 30:16
  Speaker 1: I think we're still in a period of choppy performance.
• 30:19
  Speaker 1: So it's one sense, you know, the forecast, our forecast
• 30:21
  Speaker 1: sounds like soft landing. I've tried to ban that phrase
• 30:25
  Speaker 1: advance guard of my colleagues because they said, even if
• 30:28
  Speaker 1: even if the ultimate landing is soft, it's it's the
• 30:30
  Speaker 1: air bags may drop in the plane, like it's not
• 30:32
  Speaker 1: gonna feel like. It's gonna feel choppy. This year, I
• 30:35
  Speaker 1: think the economy globally will take a beating. China's growing
• 30:38
  Speaker 1: um lower than they report and lower than they expected,
• 30:43
  Speaker 1: and we're gonna have some chopping this here in the US.
• 30:45
  Speaker 1: So they were a twelve percent, they've fallen into about
• 30:48
  Speaker 1: six percent. Are leaning indicators for two years saying real
• 30:51
  Speaker 1: feel is closer to five, which, by the way, we
• 30:54
  Speaker 1: do not fail with five percent in the United States. Yeah,
• 30:57
  Speaker 1: I mean and there were they were they're you know,
• 30:58
  Speaker 1: they're doing a tight rope, right, I mean, they are
• 31:00
  Speaker 1: what we call this fight and retreat mode. You know,
• 31:02
  Speaker 1: when they have softness will stimulate a little bit. But
• 31:05
  Speaker 1: the trend is down. Part of that is good news. UM.
• 31:07
  Speaker 1: But I think the trade uncertainties UH, you know, really damaged.
• 31:12
  Speaker 1: I think consumer confidence in China. Really this slowdown is
• 31:16
  Speaker 1: different from past China slowdowns, and that the consumer UH
• 31:20
  Speaker 1: is more at the epicenter of the slowdown. Again, we
• 31:23
  Speaker 1: are not calling for a hard landing in China, nor
• 31:25
  Speaker 1: a recession in the US, but when you have the
• 31:28
  Speaker 1: two largest economies, UH set up for some weakness. UM.
• 31:32
  Speaker 1: You know that this this nagging concern of recession. I
• 31:35
  Speaker 1: don't think we'll dissipate entirely this year. So let's talk
• 31:38
  Speaker 1: a little bit about China and trade because it's such
• 31:43
  Speaker 1: a fascinating area, especially in light of some of the
• 31:47
  Speaker 1: pushback to globalization. I want to I want to pull
• 31:51
  Speaker 1: a paragraph, UM out from something you had written previously.
• 31:56
  Speaker 1: Fifteenth century China had been open to trade, and it
• 31:59
  Speaker 1: was at a time the top economy of the world.
• 32:02
  Speaker 1: It's navy was larger than the British Navy would be
• 32:05
  Speaker 1: three centuries later. Subsequently, in the Ming Dynasty, they closed
• 32:10
  Speaker 1: off the country and there was a five hundred year
• 32:13
  Speaker 1: decline in China's innovation. Explain well, I think you know
• 32:19
  Speaker 1: China's history, Um, you know, really glorious history. I think
• 32:22
  Speaker 1: as a testament UM to the power of globalization, the
• 32:27
  Speaker 1: openness to other ideas, as well as the risk that
• 32:30
  Speaker 1: society's face should they close their minds uh and their
• 32:35
  Speaker 1: walls to to competition and new ideas. I mean, China
• 32:38
  Speaker 1: missed the Industrial Revolution because they closed off to the West. Now,
• 32:44
  Speaker 1: if you also, I've read a lot of China history
• 32:46
  Speaker 1: to educate myself, not having been bored in China, but
• 32:50
  Speaker 1: I've visited there. And what you do read at the
• 32:52
  Speaker 1: same time is you know the the West, Uh. You
• 32:56
  Speaker 1: know is not um does not escape from criticism and
• 32:59
  Speaker 1: how which and how we contributed or shaped some China
• 33:03
  Speaker 1: policies in the eighteenth and nineteenth century. Right goes back
• 33:06
  Speaker 1: to the Opium Wars in the in the British. So UM,
• 33:09
  Speaker 1: I think you know you're The more you read China history,
• 33:11
  Speaker 1: the more you read two things. One is um you
• 33:14
  Speaker 1: know their their their will as well as their belief
• 33:18
  Speaker 1: to rise back to where they were at the leading
• 33:20
  Speaker 1: economy in the world, the great power UM. You know,
• 33:23
  Speaker 1: there's a line from Conspucia Confucius great quote, there shall
• 33:27
  Speaker 1: not be two stars in the sky, nor two emperors
• 33:31
  Speaker 1: on earth. It's a it can be a little u
• 33:33
  Speaker 1: nerving in today's environment between this between the US and China.
• 33:37
  Speaker 1: I don't think it has to be as adversarial UM
• 33:40
  Speaker 1: as as some fear UM. But I think you know,
• 33:43
  Speaker 1: the tensions that we see um, economic, um, technology, military
• 33:49
  Speaker 1: wise between the U. S and China, that's just I
• 33:51
  Speaker 1: think that's gonna be with us for some time. UM.
• 33:54
  Speaker 1: But China UM. China has a roughly a fifteen or
• 33:57
  Speaker 1: twenty year window to escape what what one calls the
• 34:00
  Speaker 1: middle income trap, right to get wealthier middle average household income.
• 34:04
  Speaker 1: They've they've they've astounded the world and their progress to
• 34:08
  Speaker 1: mankind has never seen in recorded history of the amount
• 34:11
  Speaker 1: and the rapidity of economic development. UM. But they're not
• 34:15
  Speaker 1: out of the woods. I mean, I think it's been
• 34:16
  Speaker 1: risky to discount China UM. But you know, they have
• 34:20
  Speaker 1: some challenges to work through. The demographic challenge that they
• 34:23
  Speaker 1: face over the next thirty or forty years is the
• 34:26
  Speaker 1: biggest one. Well, that single child policy is turned out,
• 34:29
  Speaker 1: their population is gonna drop. Just think about that. Over
• 34:33
  Speaker 1: the center. Those are the unintended consequences of that sort
• 34:36
  Speaker 1: of social engineering Number one. But still, given how rapidly
• 34:43
  Speaker 1: their quasi centrally planned economy has grown, is there any
• 34:48
  Speaker 1: reason to think they can't become the dominant economic power
• 34:52
  Speaker 1: they happen to be. Yes, I mean, and that what
• 34:57
  Speaker 1: I think. Here's the thing. I love how you just
• 34:59
  Speaker 1: mentioned that, Barry, because you've you've hit on this for
• 35:01
  Speaker 1: a long time. Um, And so I'm gonna say this
• 35:04
  Speaker 1: as an economist, UM, I think economic growth is often
• 35:08
  Speaker 1: for investors is focused on too much. So I could
• 35:12
  Speaker 1: show you a chart, and we were showing this for
• 35:13
  Speaker 1: a decade actually in the depths of two thousand and nine,
• 35:15
  Speaker 1: two thousand and ten. I show you a nice handy
• 35:18
  Speaker 1: dandy chart that shows this the relationship between long run
• 35:21
  Speaker 1: economic growth of a country and its stock returns hard
• 35:25
  Speaker 1: There's a zero correlation. It looks like a shotgun on
• 35:27
  Speaker 1: a page, which as an economist you kind of not
• 35:30
  Speaker 1: like you kind of talking yourself out of a job.
• 35:32
  Speaker 1: And I think that's important because it's like rather more
• 35:34
  Speaker 1: than expected growth. It's the price paid for growth. It's evaluations.
• 35:38
  Speaker 1: That's why, Yeah, I would say market the UK, China matters.
• 35:42
  Speaker 1: That's why, you know, even as the economic performance has
• 35:45
  Speaker 1: been languaged at times in the US, we were very
• 35:49
  Speaker 1: optimistic on US investment returns. You can see our first
• 35:52
  Speaker 1: outlook in two thousand and ten. Some just we thought
• 35:56
  Speaker 1: we we thought we'd be above average historical returns. If anything,
• 35:59
  Speaker 1: we were too low in our distribution. We got above
• 36:01
  Speaker 1: the mean. UM. Now, as the economy has caught in
• 36:05
  Speaker 1: closer to full employment every year, we've gotten more conservative
• 36:07
  Speaker 1: and guarded and our investment returns it's because of the
• 36:10
  Speaker 1: valuation you point to, so so good rule of thumb,
• 36:13
  Speaker 1: markets get got in half. Not the worst time in
• 36:15
  Speaker 1: the world to buy equities, it's it's not so. Let's
• 36:17
  Speaker 1: circle back to the financial crisis that you mentioned. Are
• 36:22
  Speaker 1: we still feeling the effects of that crisis today, more
• 36:26
  Speaker 1: than ten years later. I think we are globally. I mean,
• 36:29
  Speaker 1: the that sort of tight grip has continues to recede. UM.
• 36:34
  Speaker 1: I think you see it even from some investors, UM
• 36:37
  Speaker 1: waiting for the next shooter drop. You know, the risk
• 36:40
  Speaker 1: aversion savings. I mean, you know, some of the US
• 36:43
  Speaker 1: probably needed. I think we got a little bit better balanced. Um.
• 36:47
  Speaker 1: We've clearly seen it in in in the regulatory front
• 36:50
  Speaker 1: across the various markets over the past several years. UM.
• 36:53
  Speaker 1: You know, with every passing day, though, it kind of
• 36:55
  Speaker 1: recedes in the rear view mirror. UM. So we're we're
• 36:59
  Speaker 1: not fully out the woods, but we have come a
• 37:01
  Speaker 1: long way. So the the low growth that we've been
• 37:05
  Speaker 1: talking about, the low productivity soft GDP UM again, is
• 37:10
  Speaker 1: that hangover effect of the crisis or is there something else? Well,
• 37:13
  Speaker 1: it was it was part I mean we over consumed,
• 37:15
  Speaker 1: as you know many of your past guests have have illuminated.
• 37:19
  Speaker 1: But again it's that's where we focused on the trend.
• 37:21
  Speaker 1: The trend was starting the bend two thousand, two thou
• 37:23
  Speaker 1: and two, which why we come back to productivity. And
• 37:26
  Speaker 1: again I don't I would hope that, Um, you know
• 37:28
  Speaker 1: that your listeners. I don't. I do not wish or
• 37:32
  Speaker 1: intend to be portrayed as a techno optimist. I mean,
• 37:35
  Speaker 1: I think there are reasons to be optimistic, but you know,
• 37:39
  Speaker 1: productivity will pick up that I that I have high
• 37:42
  Speaker 1: conviction in UM over the next several years, and it's
• 37:46
  Speaker 1: an environment of potentially higher growth that no one's is
• 37:49
  Speaker 1: anticipating the same way in the mid nineties, no one
• 37:51
  Speaker 1: was anticipating in the late nineties. But that does not
• 37:53
  Speaker 1: mean there's not gonna be headwinds and challenges that the
• 37:56
  Speaker 1: the need for job training, as an example on automation
• 38:00
  Speaker 1: for a right in the pickup an automation is significant
• 38:03
  Speaker 1: even if we do not have widespread job losses. I mean,
• 38:06
  Speaker 1: there could be a very well ten years from now
• 38:08
  Speaker 1: companies on average maybe spending more for job retraining than
• 38:12
  Speaker 1: they will be on I T So that you know,
• 38:15
  Speaker 1: that's the sort of thing I just you know, and
• 38:17
  Speaker 1: that's not again it's there's cautious optimism in my in
• 38:21
  Speaker 1: my in my council to my daughter, but it's not pollyannish.
• 38:24
  Speaker 1: I mean, there's challenges we all face and uh, the
• 38:28
  Speaker 1: technology can cut both ways. So so let's stay with
• 38:31
  Speaker 1: the concept of the advantages of the exchange of ideas
• 38:34
  Speaker 1: in global trade. How do you square that with what
• 38:38
  Speaker 1: we've seen in terms of the rise of popularism, the
• 38:42
  Speaker 1: United States pulling out from TPP and the powers according
• 38:46
  Speaker 1: a number of other UM policies and trade packs and
• 38:50
  Speaker 1: even um the UK and Brexit, are we moving away
• 38:55
  Speaker 1: from globalization with it's it's certainly stalled. And if you
• 38:58
  Speaker 1: define globalization tradition only which is fair by trade, I
• 39:02
  Speaker 1: mean our our ideal multiplier rises above that and say,
• 39:05
  Speaker 1: although trade does matter, it's the trade of ideas of knowledge,
• 39:08
  Speaker 1: the exposure if I'm exposed to your idea, Barry, even
• 39:11
  Speaker 1: if you live halfway away in the world, and that
• 39:13
  Speaker 1: leads me to a new idea that has what has
• 39:16
  Speaker 1: changed history Now, trade sometimes encapsulates an idea, a trade
• 39:21
  Speaker 1: for a new machine or product, and so you can
• 39:23
  Speaker 1: infer knowledge. But I think we have stalled in the
• 39:26
  Speaker 1: in the globalization of trade of goods across borders. The
• 39:30
  Speaker 1: biggest reason for the rise in populism and related to
• 39:33
  Speaker 1: that is the rise of income inequality, and I think
• 39:36
  Speaker 1: a lot of academic research would show um that more
• 39:39
  Speaker 1: of it has been driven by technology than by potentially
• 39:43
  Speaker 1: unfair trade practices. UM. So what that means is if
• 39:47
  Speaker 1: the pace of technol technological change is not slowing, that
• 39:50
  Speaker 1: means unfortunately the radar that that the level of income
• 39:53
  Speaker 1: inequality may remain high. And so these UM, what some
• 39:56
  Speaker 1: call populistic populism, tensions in the world may remain elevated.
• 40:02
  Speaker 1: Uh that that had told us two years ago that
• 40:04
  Speaker 1: like any at any election where in a country where
• 40:07
  Speaker 1: income inequality has risen significantly, I would say the election
• 40:10
  Speaker 1: is going to be closer than anticipated. Shock can be
• 40:13
  Speaker 1: shocked at the outcome. I'm not a political handicapper, but
• 40:15
  Speaker 1: it says that we should expect surprises, UM, because I
• 40:19
  Speaker 1: think there is UM. Again back to this, happiness can
• 40:22
  Speaker 1: be relative. The rise of income inequality UM in a
• 40:26
  Speaker 1: low growth environment UM, you know, has led to you know,
• 40:30
  Speaker 1: some painful losses of some jobs opportunities, including the United States,
• 40:36
  Speaker 1: And so I think that's something that not to lose
• 40:38
  Speaker 1: sight of. So rising income in equality gives gives rise
• 40:42
  Speaker 1: to increase in populism, it can, it can, which gives
• 40:46
  Speaker 1: rise to closer elections. And does that mean political parties
• 40:51
  Speaker 1: carry less sway and people vote that. I don't know,
• 40:54
  Speaker 1: you know, I wish, as I'm trying to be careful
• 40:56
  Speaker 1: here with my statements, I wish though the political environment
• 40:59
  Speaker 1: wasn't so um polarized. UM, you know, I I uh,
• 41:04
  Speaker 1: you know, it's you know, it's I think it's natural,
• 41:06
  Speaker 1: and it's actually a healthy environment when we're debating. But
• 41:10
  Speaker 1: if we're debating and listening, you know where I hope
• 41:13
  Speaker 1: where you worry about is when in any in any society,
• 41:16
  Speaker 1: forget politics for the side, any society, that we're not
• 41:19
  Speaker 1: listening to each other and so we're talking beyond each other.
• 41:22
  Speaker 1: And today we see the backlash effect. When you present
• 41:26
  Speaker 1: facts to people, it just hardens their position if they
• 41:29
  Speaker 1: don't want to accept those facts. We have been speaking
• 41:32
  Speaker 1: with Joe Davis a Vanguard where he is Chief Economists
• 41:35
  Speaker 1: and wears a number of other hats. If you enjoy
• 41:38
  Speaker 1: this conversation, we'll be sure and come back for the
• 41:41
  Speaker 1: podcast extras. Will we keep the tape rolling and continue
• 41:44
  Speaker 1: discussing technology, productivity, global trade and idea multipliers and what
• 41:49
  Speaker 1: they mean for the future. We love your comments, feedback
• 41:53
  Speaker 1: and suggestions right to us at m IB podcast at
• 41:57
  Speaker 1: Bloomberg dot net. You can follow me on Twitter at
• 42:00
  Speaker 1: Rid Halts or check out my daily column at Bloomberg
• 42:03
  Speaker 1: dot com slash Opinion. I'm Barrier Halts. You're listening to
• 42:07
  Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast, Joe,
• 42:24
  Speaker 1: Thank you so much for doing this I've been looking
• 42:26
  Speaker 1: forward to having this conversation. UM. You spoke at a
• 42:30
  Speaker 1: conference we hosted I want to say about a year
• 42:33
  Speaker 1: ago in southern California, and you touched on some of
• 42:37
  Speaker 1: the ideas from UM, the idea multiplier and the long
• 42:41
  Speaker 1: term trend of of global exchange of ideas. So I
• 42:44
  Speaker 1: knew this was going to be a very interesting conversation.
• 42:48
  Speaker 1: Some of the questions I didn't get to were the
• 42:51
  Speaker 1: traditional boring economic questions, so I'm gonna skip most of
• 42:56
  Speaker 1: those and and just ask you a couple of short
• 43:00
  Speaker 1: economic questions that I'm kind of keep. Well, you go
• 43:03
  Speaker 1: on as you could. You can answer them in as
• 43:06
  Speaker 1: much depth as you like. But there I'm not asking
• 43:09
  Speaker 1: you what do you think of GDP? I want to say, Well,
• 43:12
  Speaker 1: let me ask this question. What do you think are
• 43:14
  Speaker 1: the most important economic indicators? I know people over emphasize
• 43:18
  Speaker 1: some and under under emphasized others. What do you think
• 43:23
  Speaker 1: are the three most important things that we should be
• 43:25
  Speaker 1: looking I'll give you Barry, we we I genuinely believe this,
• 43:28
  Speaker 1: and we do this. We look at all of them,
• 43:30
  Speaker 1: right so we we for a long time, since I've
• 43:32
  Speaker 1: been a vanguard, we use big data techniques to say,
• 43:35
  Speaker 1: list every signal, every economic statistic, job was claimed, non
• 43:40
  Speaker 1: farm payroll, manufacturing is um. They all have some signal
• 43:45
  Speaker 1: in it and noise. Think of any stock. I don't
• 43:47
  Speaker 1: think you may necessarily look at one stock to say
• 43:49
  Speaker 1: how's the broad market doing. So we will we look
• 43:52
  Speaker 1: at all of them and see what is the an
• 43:54
  Speaker 1: extract from that, what is the momentum and the common
• 43:58
  Speaker 1: signal across the economy. Because every indicator goes through fits
• 44:03
  Speaker 1: and starts of saying being very valuable and then not
• 44:05
  Speaker 1: being valuable. So I'd say that that's the answer to
• 44:08
  Speaker 1: your questions. We look at all of them and an
• 44:10
  Speaker 1: extract from that what are the common two or three
• 44:12
  Speaker 1: signals that you could say this is the trend and
• 44:15
  Speaker 1: the momentum in the economy, rather than pick any one signal.
• 44:20
  Speaker 1: So so the flip side of that question is what
• 44:24
  Speaker 1: do you think is the most over hyped economic indicator? Well,
• 44:29
  Speaker 1: I think gdphasis, I think we do. I mean, I
• 44:33
  Speaker 1: think there's a lot of accounting regulators. I mean there's
• 44:35
  Speaker 1: you know, GDP. GDP can can accelerate for a time
• 44:37
  Speaker 1: just because businesses are are have slowed their growth and
• 44:41
  Speaker 1: inventories are building, right, there's a little bit of being
• 44:44
  Speaker 1: counting to it. Again, it's valuable to have came out
• 44:46
  Speaker 1: of even war planning, you know, decades ago. Yeah, yeah, yeah,
• 44:52
  Speaker 1: the decades is going to actually government officials did not
• 44:55
  Speaker 1: know what the economy was producing and so to track that.
• 45:00
  Speaker 1: Um so a great, great development, but has its limitations.
• 45:02
  Speaker 1: I mean, if I was going to focus on on
• 45:04
  Speaker 1: one at the end of the day, it's it's job growth.
• 45:06
  Speaker 1: If you and I running a business to add a
• 45:08
  Speaker 1: new worker, to let worker go, that that's uh, that's
• 45:11
  Speaker 1: a significant investment of corporate American costs, uh cost structure.
• 45:17
  Speaker 1: So job growth is probably the most meaningful. What about
• 45:19
  Speaker 1: yield curve? We heard a whole lot of yelling and
• 45:22
  Speaker 1: screaming when the two and the five year briefly inverted,
• 45:26
  Speaker 1: not the traditional two and ten year How do you
• 45:28
  Speaker 1: look at the yeld curve? But and again you know,
• 45:30
  Speaker 1: a van grd and just we got statistics on our
• 45:33
  Speaker 1: back at our back saying of listen, I believe there's
• 45:35
  Speaker 1: a portfolio of indicators you should look at whether you're
• 45:38
  Speaker 1: trying to divide the future returns of the stock market, probability, recession,
• 45:43
  Speaker 1: odds of a bear market. Um. But that said, if
• 45:46
  Speaker 1: I was going to pick one indicator to to say
• 45:49
  Speaker 1: are we going into recession on it is the Yeld curve,
• 45:51
  Speaker 1: and it's the traditional what I would call the academic
• 45:54
  Speaker 1: one to ten, no tens and and and three months
• 45:57
  Speaker 1: tens months cash. That's the that's the os accurate, it's
• 46:00
  Speaker 1: the most genuine I know. Some said, hey, the zero
• 46:03
  Speaker 1: interest rate environment, low industrate environment is distorted. I don't
• 46:06
  Speaker 1: buy it. If we're you and are if we're going
• 46:07
  Speaker 1: into a deep downturn, I imagine the tenure treasury could
• 46:10
  Speaker 1: be a one percent and the curve is easily inverting.
• 46:13
  Speaker 1: So I think that's the bond market has. It gives
• 46:15
  Speaker 1: you more heads up on a downturn than the stock
• 46:18
  Speaker 1: market does. Now, what we've seen when at least with
• 46:21
  Speaker 1: the two and the ten is it can give you
• 46:24
  Speaker 1: a lead time of about a year if your memory
• 46:27
  Speaker 1: serves the three months and the ten year similar semi,
• 46:30
  Speaker 1: it's actually a little bit farther out right because the
• 46:32
  Speaker 1: markets forward looking and at least past four or fifty years.
• 46:36
  Speaker 1: Not not to blame the FED, but the FED has
• 46:38
  Speaker 1: generally been an overly restrictive territory to tamp down inflation. Right,
• 46:43
  Speaker 1: So the two's have been elevated above the tens. I've
• 46:47
  Speaker 1: exteen me above cash, you know a year out, you know,
• 46:50
  Speaker 1: anticipating further FED tightening. At that point, perhaps the market
• 46:53
  Speaker 1: is pricing in a quote unquote FED mistake or overly restrictive.
• 46:57
  Speaker 1: That's the power of the yeld curve. It's not in
• 46:59
  Speaker 1: foul bawl um. But if you were going to pick
• 47:02
  Speaker 1: one indicator, and I wouldn't because you're reducing your odds
• 47:05
  Speaker 1: of success. But if you did, that would be the
• 47:07
  Speaker 1: one that hang your hat on. So we mentioned the
• 47:09
  Speaker 1: hangover effect that we're still feeling from the Great Financial Crisis.
• 47:14
  Speaker 1: Let me bring this back to rates in the yield curve.
• 47:18
  Speaker 1: Back in the late seventies, when inflation had spiked dramatically
• 47:21
  Speaker 1: the oil UH the Arab boil embargo UH, plus the
• 47:25
  Speaker 1: malaise of Vietnam and watergate. Then FED Chief Paul Volker
• 47:30
  Speaker 1: spiked rates to pick a number fift. It broke the
• 47:35
  Speaker 1: back of inflation, and then we were looking at a
• 47:38
  Speaker 1: thirty plus year bullmarket and bonds as rates gradually fell
• 47:42
  Speaker 1: from there. How do you since you look at trends
• 47:46
  Speaker 1: and momentum. How do you contextualize those two. It appears
• 47:50
  Speaker 1: that the that trend line has been broken and the
• 47:53
  Speaker 1: momentum is now moving in a different direction. What does
• 47:55
  Speaker 1: that tell us about bonds and the state of the world. Well,
• 47:58
  Speaker 1: I think you know that actually the pattern of of
• 48:01
  Speaker 1: bond yields. So I know, again, including Vanguard's founder Jack Bogel,
• 48:06
  Speaker 1: rest in peace, long believer in mean reversion. Why I'm
• 48:10
  Speaker 1: bringing this up is I think mean reversion is clearly
• 48:13
  Speaker 1: the most powerful force in finance. It's also the most dangerous.
• 48:17
  Speaker 1: And I use interest rates an example, because even a Vanguard,
• 48:20
  Speaker 1: we've had some clients you know, understandably concerned of a
• 48:22
  Speaker 1: rapid rise in in in interest rates in bon yields
• 48:26
  Speaker 1: because they lived through the seven from a very low,
• 48:28
  Speaker 1: very low yes, but you know, concerns of a bond
• 48:30
  Speaker 1: bear market. And uh, you know our analysis said that,
• 48:34
  Speaker 1: although possible, extremely unlikely. And that's what Just because interest
• 48:38
  Speaker 1: rates are low today doesn't mean they have to revert
• 48:41
  Speaker 1: to some to some average. My question is what's the
• 48:44
  Speaker 1: danger and mean reversion is what mean are we reverting to?
• 48:48
  Speaker 1: This is the same mistake. I we believe some investors
• 48:51
  Speaker 1: have made over the past several years with the CAPE,
• 48:53
  Speaker 1: the Schiller cape ratio. Nothing wrong with the sicklely Justepe
• 48:57
  Speaker 1: ratio or the level of interest rates. But what is
• 49:00
  Speaker 1: normal that's conditional on what are the forces that drive
• 49:03
  Speaker 1: those factors. So an interest rates, for example, I believe
• 49:06
  Speaker 1: that a fair value we are fair value for long
• 49:09
  Speaker 1: term interustrates hasn't changed in you if it's roughly three percent,
• 49:12
  Speaker 1: so even though that's below where the seventies and eighties
• 49:15
  Speaker 1: average was, inflation was higher. Then So I would tell
• 49:18
  Speaker 1: investors if you if you worry about or believe that
• 49:21
  Speaker 1: interest rates are going to rise maturally long term interest rates,
• 49:24
  Speaker 1: mortgage rates tend your treasurreates, you have to believe that
• 49:27
  Speaker 1: inflation is fundamentally going to accelerate on a trend basis.
• 49:31
  Speaker 1: So let's let's talk about the CAPE. You brought it up,
• 49:34
  Speaker 1: going back to the early nineteen nineties. The CAPE has
• 49:37
  Speaker 1: spent I think it's something like at the time above
• 49:42
  Speaker 1: its average trend. Is there no mean regression there? Or
• 49:46
  Speaker 1: are we using and thinking about CAPE incorrectly? It doesn't
• 49:50
  Speaker 1: seem yea, so the valuation great reach. I mean the
• 49:54
  Speaker 1: CAPE going back to Bob Shiller, Yale and others. You
• 49:56
  Speaker 1: know that that that that measure is formative for the
• 50:01
  Speaker 1: whether the more stock market is fairly valued. Our issue
• 50:04
  Speaker 1: is with investors comparing that to the long run average.
• 50:07
  Speaker 1: So they just draw a line across their piece of paper.
• 50:09
  Speaker 1: The cap has been sometimes below into your point barrier,
• 50:11
  Speaker 1: it's been generally above ever the past twenty years. Well,
• 50:14
  Speaker 1: what's actually important is is that you actually have to
• 50:17
  Speaker 1: control for what the what is the fair value that
• 50:20
  Speaker 1: the market should the gravitational pull is should go to.
• 50:23
  Speaker 1: We shouldn't always go to the same average. And so
• 50:25
  Speaker 1: our analysis and we had a academic research published last year.
• 50:30
  Speaker 1: They show that you can actually significantly improve your your
• 50:33
  Speaker 1: your likelihood of projecting five and tenure out returns significantly
• 50:38
  Speaker 1: if you control for the level of interest rates real
• 50:40
  Speaker 1: interest rates in the economy. In other words, when you
• 50:42
  Speaker 1: have really low interest rates and you should have higher peed,
• 50:47
  Speaker 1: all else equal, it's called the fair value, just like
• 50:49
  Speaker 1: sometimes full employments at four sometimes it's at five percent.
• 50:52
  Speaker 1: Sometimes fair value for the U S dollars higher lowan. Now,
• 50:55
  Speaker 1: again I do not know exactly what the fair value is,
• 50:59
  Speaker 1: but I can tell you that the range that the
• 51:01
  Speaker 1: stock market should gravitate towards either up towards it or
• 51:05
  Speaker 1: down towards it. That fair value can change through time
• 51:08
  Speaker 1: with economic conditions and trend conditions, warn't it, And that
• 51:11
  Speaker 1: which is why only in the past year, how we
• 51:14
  Speaker 1: did we become more guarded on the stock market. So
• 51:17
  Speaker 1: despite low growth environment and low interest rates, our indicators
• 51:21
  Speaker 1: were saying that the the U S stock market was
• 51:24
  Speaker 1: clearly undervalued in two thousand and ten, despite some saying
• 51:27
  Speaker 1: it's a new normal and all that. On the investment side,
• 51:29
  Speaker 1: we were saying a very high expected return premium for
• 51:33
  Speaker 1: U S stocks that remained pretty constructive up until more recently.
• 51:37
  Speaker 1: And only recently did the US stock market in the
• 51:40
  Speaker 1: CAPE ratio break above that fair value range. And again
• 51:45
  Speaker 1: we have no predictability on next year's return, but it
• 51:48
  Speaker 1: does have some predictability and where the stock market the
• 51:51
  Speaker 1: average return will be over the next five or ten ures.
• 51:53
  Speaker 1: So is there mean reversion, yes, but I think we
• 51:56
  Speaker 1: just have to be careful what means we are reverting to,
• 51:58
  Speaker 1: whether it's interest rates were valuations. So therefore, with elevated
• 52:04
  Speaker 1: um valuations in the US, I'm gonna assume you're expected
• 52:08
  Speaker 1: returns for the next decade is going to be below average. Yeah, oh, certainly,
• 52:13
  Speaker 1: and we've we've had that for for over three years. Um.
• 52:16
  Speaker 1: You know, actually this year is the first time that
• 52:18
  Speaker 1: we did not maturely downgrade or expect a ten your
• 52:21
  Speaker 1: your turnout look for a balanced portfolio. Further, right, So
• 52:25
  Speaker 1: we've been getting more guarded every year as the markets
• 52:27
  Speaker 1: have actually rewarded us on average. So a little bit
• 52:30
  Speaker 1: more constructive outside the US over the next five or
• 52:33
  Speaker 1: ten years. Um, uh, the US. So I think smart investors,
• 52:38
  Speaker 1: you know, even even a simple contrarian strategy of rebalancing
• 52:41
  Speaker 1: UM is probably putting more money to work at the
• 52:44
  Speaker 1: margin outside of the US and keeping money in the
• 52:46
  Speaker 1: fixed income UM. You know, our our long drumbeat has
• 52:50
  Speaker 1: almost been boring, quite frankly. Of there's there's greater risk
• 52:53
  Speaker 1: in in the equity market than the bond market. That's
• 52:55
  Speaker 1: why you would want there as a long term investor.
• 52:57
  Speaker 1: But also let's be cautious of uh, of taking too
• 53:00
  Speaker 1: much risk in this market. Greater risk in the equity
• 53:03
  Speaker 1: market than the blonde market today. So last question about valuation.
• 53:07
  Speaker 1: There was a Wolf Street Journal article. I want to
• 53:10
  Speaker 1: say a month or so ago, and maybe it was
• 53:13
  Speaker 1: a couple of weeks ago that said, hey, that whole
• 53:17
  Speaker 1: fourth quarter eighteen pullback of almost reset valuations to the
• 53:22
  Speaker 1: point where there seemed to be sort of reasonable in
• 53:25
  Speaker 1: the US exaggeration or or now, I mean they actually
• 53:29
  Speaker 1: we're back into our fair value range first time in
• 53:32
  Speaker 1: over two years. So it's a general good thing. We
• 53:34
  Speaker 1: were still looking from you to you know, a little
• 53:36
  Speaker 1: bit more mute returns just because um, we have lower
• 53:39
  Speaker 1: expected returns for the risk free rate, for the cash
• 53:41
  Speaker 1: rate the Fed funds, and that hasn't changed. We've been
• 53:44
  Speaker 1: you know, we've been on that mind for a long time.
• 53:46
  Speaker 1: So uh but yeah, we're I do not you know,
• 53:48
  Speaker 1: we were not alarm us on the market. Um, I
• 53:50
  Speaker 1: think you know, the investment of ourn going forward, we
• 53:52
  Speaker 1: said for two years, barrier, it's it's gonna require diligence
• 53:55
  Speaker 1: and patients. And I'm not a patient person because you
• 53:58
  Speaker 1: have a low expected return, but you can't void to
• 54:00
  Speaker 1: miss periods when when that risk premium is rewarding you.
• 54:04
  Speaker 1: So you know, I think the temptation is going to
• 54:06
  Speaker 1: be to what I call shiny new objects. Do you
• 54:09
  Speaker 1: got a how our return? You know, not to say
• 54:11
  Speaker 1: that that's some you know it just gotta be careful here.
• 54:14
  Speaker 1: I think you gotta just stay stick to the plan.
• 54:17
  Speaker 1: If you're gonna take all more well, and if you're
• 54:19
  Speaker 1: gonna take all more risks, do it eyes wide open.
• 54:21
  Speaker 1: It doesn't mean one doesn't change one's plan. I just
• 54:25
  Speaker 1: think that are my job at Vanguard and my team's
• 54:27
  Speaker 1: job is just to help convey the risk and the
• 54:29
  Speaker 1: trade offs other investors trying to make tough choices under uncertainty.
• 54:34
  Speaker 1: More more often than not, it's it's a good reason
• 54:36
  Speaker 1: not to change when you when you understand where the
• 54:39
  Speaker 1: risks are. Um. But that shouldn't mean that investors don't
• 54:42
  Speaker 1: necessarily never you know, don't ever change. Just let's be
• 54:46
  Speaker 1: let's be mindful of what the trade off we're making.
• 54:49
  Speaker 1: So I know I only have you for a limited
• 54:51
  Speaker 1: amount of time, and I wanted to get to my
• 54:53
  Speaker 1: favorite questions. Let's let's uh, and I know you get
• 54:57
  Speaker 1: to listen to these when you're out running Saturday morning,
• 55:00
  Speaker 1: so let me uh, let me jump right in this.
• 55:03
  Speaker 1: Tell us the most important thing people don't know about
• 55:07
  Speaker 1: Joe Davis. So the little personal thing is I grew
• 55:10
  Speaker 1: up ten minutes from aguards building, which is which is astonishing,
• 55:13
  Speaker 1: astonished thing. If I actually had an arm, if I
• 55:16
  Speaker 1: could have actually played baseball professional, I could probably hit
• 55:19
  Speaker 1: my my parents house. The other thing is I was actually,
• 55:22
  Speaker 1: to my understanding, I was one of the few, effect
• 55:24
  Speaker 1: that perhaps the only non academic to have been led
• 55:28
  Speaker 1: in the National Bureau of Economic Research, So you want
• 55:30
  Speaker 1: to do. My dissertation was on economic history, not a
• 55:33
  Speaker 1: very popular topic. It's kind of had a Renaissance history,
• 55:38
  Speaker 1: not economic no, it's economics. But I did it. I
• 55:40
  Speaker 1: I created an effectively of a pre GDP GDP measure
• 55:45
  Speaker 1: going all the way back to the seventeen nineties. I
• 55:48
  Speaker 1: didn't know what I was getting into. If I had
• 55:49
  Speaker 1: known how much work it was, very I would have
• 55:51
  Speaker 1: never have done it. For the nineteenth century, an annual
• 55:54
  Speaker 1: measure of business cycles and economic activity. And um I
• 55:58
  Speaker 1: was you know. The the NBR urges at the time
• 56:00
  Speaker 1: were very courteous uh to allow me to to to
• 56:04
  Speaker 1: participate formally. Eventually they kicked me out because I'm I'm
• 56:08
  Speaker 1: in the private sector. I think that's fair. But to
• 56:10
  Speaker 1: this day I'm a I'm a fervent reader and participant
• 56:13
  Speaker 1: in economic history. Quite quite fascinating. Who were some of
• 56:17
  Speaker 1: your early mentors. But the first one was before I
• 56:20
  Speaker 1: came to Vanguard. So after my first year duke in
• 56:23
  Speaker 1: the PhD program, I actually I left because I was
• 56:26
  Speaker 1: unsure if I wanted to go into academia. And I
• 56:28
  Speaker 1: worked for a company right in Westchester, Pennsylvania, again five
• 56:31
  Speaker 1: minutes from where I grew up, So I don't I
• 56:33
  Speaker 1: tend to stay close to home here Barry as a theme, uh.
• 56:36
  Speaker 1: And I worked for now what's called um, you know,
• 56:39
  Speaker 1: Moody's economy doctor. So I'm worked with Mark Zandi, a
• 56:42
  Speaker 1: great experience. Uh. I learned from Mark some of the
• 56:45
  Speaker 1: things they you don't learn as an economist in grad school,
• 56:48
  Speaker 1: the economic data, how to really right well for particularly
• 56:52
  Speaker 1: a non academic audience, how to present to a too
• 56:55
  Speaker 1: large audience with not being ton esoteric. Uh. So he
• 56:59
  Speaker 1: was great mentor. I learned a lot. And Zandy, if
• 57:02
  Speaker 1: memory serves, was chief economic advisor to Vice President Biden.
• 57:06
  Speaker 1: Is that I think he was. In fact, he's he's
• 57:08
  Speaker 1: a he's now a close neighbor of mine, and actually
• 57:11
  Speaker 1: I see him running sometimes on the weekend. So again
• 57:15
  Speaker 1: I have high praise from another early mentor. Was Bob
• 57:18
  Speaker 1: Outwood or at Vanguard? He took chances on me. He
• 57:21
  Speaker 1: could have hired any economists. Now, I was the only
• 57:23
  Speaker 1: economist of Vangar, so maybe he didn't have much choice.
• 57:25
  Speaker 1: But Bob, Bob was the head of fixed income. He
• 57:29
  Speaker 1: was tough, he was demanding. He was also fair, and
• 57:32
  Speaker 1: I learned a lot from him. And again I will
• 57:35
  Speaker 1: always oh Bob and many others at Vanguard for taking
• 57:38
  Speaker 1: chances on me. So let's talk about investors who influenced
• 57:42
  Speaker 1: the way you look at the world of UH data
• 57:46
  Speaker 1: and valuation and investment. I'll give you two, Um, I'll
• 57:50
  Speaker 1: give you three. One is uh you know Jack Bogel
• 57:53
  Speaker 1: clearly um Uh. I knew of his work and was
• 57:57
  Speaker 1: educated myself before I came to Vanguard, but then I
• 58:00
  Speaker 1: realized how much I did not know. Um. Secondly, was
• 58:03
  Speaker 1: even something I started reading in high school. Burt Malkiel
• 58:06
  Speaker 1: Random Walked Down Wall Street was one of the first
• 58:07
  Speaker 1: books around investments that I ever read. Marry now and
• 58:10
  Speaker 1: it's like eleventh edition, I think I had. I had
• 58:12
  Speaker 1: to read it twice because I didn't understand it all
• 58:14
  Speaker 1: the first time. Um. And then more recently, you know, uh,
• 58:18
  Speaker 1: individuals such as Cliff Assess uh at a q r UM.
• 58:22
  Speaker 1: You know, I'm a fan of their research, and I
• 58:24
  Speaker 1: think they do good work, and I think they treat
• 58:26
  Speaker 1: data with the humility and respected deserves. So you mentioned
• 58:30
  Speaker 1: a couple of books earlier as well as Random down
• 58:33
  Speaker 1: Wall Street. Tell us about some of your favorite books,
• 58:36
  Speaker 1: be they finance or not, fiction or not. What what
• 58:39
  Speaker 1: do you like and what are you reading? Well, you
• 58:41
  Speaker 1: know some of the recent stuff that I was reading
• 58:43
  Speaker 1: around the Idea multiplier, give you one, the Idea Factory,
• 58:47
  Speaker 1: so fascinating study around Bell Labs, always going back to
• 58:51
  Speaker 1: the twenties, wonderful. I mean there's a great story if
• 58:55
  Speaker 1: you even wonder where the freight or the word cell
• 58:57
  Speaker 1: phone came from. Uh, and their stories of them trying
• 59:00
  Speaker 1: the test radio cell towers and at nighttime in Philly
• 59:04
  Speaker 1: driving around because they didn't know how to where to
• 59:06
  Speaker 1: put the antenna. I mean, it's some great stories. I'm
• 59:09
  Speaker 1: a great reader of I try to read a lot
• 59:12
  Speaker 1: on on on political and economic history. So anything written
• 59:17
  Speaker 1: by David McCulloch, you know, The Wright Brothers is his best. Uh.
• 59:21
  Speaker 1: It's fascinating book. Uh. In my in my judgment, I
• 59:24
  Speaker 1: read a lot on Um. If you want to read
• 59:26
  Speaker 1: a little bit more of an alarming UH study on
• 59:30
  Speaker 1: between the tensions of the U. S and China, you
• 59:32
  Speaker 1: can build Michael Pillsbury the hundred Year Marathon. Um. You know,
• 59:36
  Speaker 1: I don't necessarily agree with all of it, but it's
• 59:38
  Speaker 1: it's worth a read. Um. I Also, my wife and
• 59:41
  Speaker 1: I love to cook, so I have some favorite cookbooks.
• 59:44
  Speaker 1: We probably have add of them if you want. Really,
• 59:47
  Speaker 1: if you care about good barbecue. My friend at Vanguard,
• 59:49
  Speaker 1: he turned me on to Franklin's Barbecue. So it's a barbecue, yeah,
• 59:54
  Speaker 1: it is, it is. I I think I've underlined more
• 59:57
  Speaker 1: in that book than I have my economics textbooks and
• 59:59
  Speaker 1: grab school. If you want to know how to cook
• 1:00:02
  Speaker 1: great brisket, um and barbecue, that's easy to just cook
• 1:00:06
  Speaker 1: the hell out of it. You no, no, But I
• 1:00:08
  Speaker 1: tell you this book it Frankly, they give you everything.
• 1:00:11
  Speaker 1: It's it's a famous I believe they're in Austin, Texas.
• 1:00:13
  Speaker 1: So I've never been to the restaurant, but I've read
• 1:00:16
  Speaker 1: their book. It's worth a read. You've been to Austin,
• 1:00:19
  Speaker 1: I assume, yes, that's a great uh, a great food town.
• 1:00:23
  Speaker 1: So when you say you and your wife left to cook,
• 1:00:25
  Speaker 1: do you prepare meals together? Do you do a we'll
• 1:00:28
  Speaker 1: split up. She does the hard stuff, which is the baking.
• 1:00:30
  Speaker 1: She's very precise measuring. Despite all my analytical background, I
• 1:00:35
  Speaker 1: find cooking therapeutic. I I only look in the ingredient lists.
• 1:00:38
  Speaker 1: I never measure. I can never replicate anything I do.
• 1:00:41
  Speaker 1: That of course implies that actually tasted good. But uh,
• 1:00:44
  Speaker 1: I find it. It's actually a good, a creative release,
• 1:00:47
  Speaker 1: whether it's cutting vegetables or just spending time with the family.
• 1:00:52
  Speaker 1: I think it's you know, my my big turning point
• 1:00:54
  Speaker 1: was not worrying whether or not the dish turns out right.
• 1:00:58
  Speaker 1: He was worried about making a mistake. That that's quite fascinating.
• 1:01:01
  Speaker 1: We Sunday night, we have a shelf full of cookbooks.
• 1:01:05
  Speaker 1: We pull a cookbook out and Sunday evening dinner is
• 1:01:08
  Speaker 1: always a new recipe. Sometimes it's delightful and sometimes not.
• 1:01:13
  Speaker 1: But it's that process of just messing around. It's fantastic
• 1:01:18
  Speaker 1: because I'm not a creative person, you know, and so
• 1:01:21
  Speaker 1: I found that really you are. Your research is creating
• 1:01:25
  Speaker 1: new ways of analyzing things like I'll take it as
• 1:01:27
  Speaker 1: a comment. Economists don't always get the creative. That's fair.
• 1:01:32
  Speaker 1: So tell us about what excites you now, what what
• 1:01:35
  Speaker 1: changes are you looking forward to in the industry. Well,
• 1:01:39
  Speaker 1: you know, I'm you know, being part of Vanguard. It's
• 1:01:41
  Speaker 1: a great company to be a part of. I'm proud
• 1:01:42
  Speaker 1: of our culture. I'm excited about just all investors globally.
• 1:01:47
  Speaker 1: I think, um, they're going to have a great opportunity
• 1:01:50
  Speaker 1: for lower call the adoption of what I think is
• 1:01:53
  Speaker 1: a high value technology, which is low cost portfolios. I
• 1:01:56
  Speaker 1: think we're stole only on the third or four fourth
• 1:01:58
  Speaker 1: inning of this United States. What is it of total
• 1:02:02
  Speaker 1: But again, if you I I look in the world,
• 1:02:04
  Speaker 1: I look at the inverse of that, which is probably
• 1:02:06
  Speaker 1: roughly fifty of investments. Perhaps there are stolen two high
• 1:02:09
  Speaker 1: cost products, but you're saying is probably stolen too. And
• 1:02:18
  Speaker 1: if you say a low cost, high value product actively managed,
• 1:02:23
  Speaker 1: passively managed, perhaps rapid vice around that. Uh, that's the
• 1:02:27
  Speaker 1: adoption of of a wonderful technology that I think if
• 1:02:31
  Speaker 1: there's an s curve to it. In the US, we're
• 1:02:32
  Speaker 1: probably only in the third or fourth inning. In outside
• 1:02:35
  Speaker 1: the United States, we're probably in the in the game.
• 1:02:37
  Speaker 1: Just the first inning just started, So I'm I'm excited
• 1:02:40
  Speaker 1: for investors regards to who who's firm we can bring
• 1:02:44
  Speaker 1: those certain who brings them those services. But it's exciting time,
• 1:02:47
  Speaker 1: I think to be an investor despite the low return environment,
• 1:02:50
  Speaker 1: quite quite fascinating. So tell us about a time you
• 1:02:53
  Speaker 1: failed and what you learned from the experience. Well too,
• 1:02:56
  Speaker 1: I mean I felt a lot. I always thought i'd
• 1:02:59
  Speaker 1: play in the nfl U until I rose. I'm only
• 1:03:01
  Speaker 1: five ft nine, so that that What did you play
• 1:03:04
  Speaker 1: in high school in college? I played in high school.
• 1:03:05
  Speaker 1: I was lucky enough to be on the team, so
• 1:03:07
  Speaker 1: I learned a lot of failure Athletically, I tend to
• 1:03:10
  Speaker 1: be a better student. Um so I learned humility early
• 1:03:14
  Speaker 1: in life. But I tell you one time that's stuck
• 1:03:16
  Speaker 1: with me and failed. I mean, I generally got very
• 1:03:18
  Speaker 1: good grades, which is why you go to grad school.
• 1:03:19
  Speaker 1: I tried to stay in school as long as possible.
• 1:03:21
  Speaker 1: With my first class down in Duke in the PhD
• 1:03:24
  Speaker 1: program was for game theory, so leading uh teacher in
• 1:03:28
  Speaker 1: in World game theory her Ay Mulan, And the first
• 1:03:32
  Speaker 1: test I knew I didn't do well, but he writes
• 1:03:34
  Speaker 1: on the board, what the average was it was a twelve.
• 1:03:37
  Speaker 1: I got an eight. And now I was realized, this
• 1:03:40
  Speaker 1: is not out of a hundred. It was out of
• 1:03:42
  Speaker 1: a hundred. Really, I didn't realize it was out. I'm
• 1:03:45
  Speaker 1: assumed maybe the wake up call. So what the lesson
• 1:03:50
  Speaker 1: was a failing? I can't first actually failing that class.
• 1:03:53
  Speaker 1: First I realized two things. One is, I'm never going
• 1:03:55
  Speaker 1: to be a micro economist. Secondly, you're not as smart,
• 1:03:58
  Speaker 1: Joe as you think you are. And so I think,
• 1:04:02
  Speaker 1: I like to think I'm a humble person, but every
• 1:04:04
  Speaker 1: so often, as my mom says, it's it's good to
• 1:04:07
  Speaker 1: eat a little humble pie. And so that was a
• 1:04:09
  Speaker 1: great lesson to me, the need for hard work. It
• 1:04:11
  Speaker 1: was also a testament that is, if you work hard enough,
• 1:04:13
  Speaker 1: you can learn a lot of things. And so to
• 1:04:17
  Speaker 1: this day that that test is sear to my were
• 1:04:20
  Speaker 1: on my brain of you know when those days happen,
• 1:04:23
  Speaker 1: because they do happen, you can recover if you're willing
• 1:04:26
  Speaker 1: to put in the hard work. What do you do
• 1:04:28
  Speaker 1: for fun? What do you do when you're out of
• 1:04:30
  Speaker 1: the office. Such time a time of my family, my wife,
• 1:04:33
  Speaker 1: we've been together a long time, ever since college, when
• 1:04:36
  Speaker 1: she accepted my offer for a first date. I'm a
• 1:04:39
  Speaker 1: lucky man two children who are growing up quickly. I
• 1:04:42
  Speaker 1: have fifteen and thirteen year old who weren't born yet
• 1:04:45
  Speaker 1: when I came to Vanguards. So uh um, yeah maybe,
• 1:04:51
  Speaker 1: But I mean I try to. I try to read
• 1:04:53
  Speaker 1: as much. I I'm a firm beliader believer in reading.
• 1:04:57
  Speaker 1: I believe everyone should read. It's just my humble opinion.
• 1:05:00
  Speaker 1: Least three hours a day, three hours, three hours I think.
• 1:05:05
  Speaker 1: I try. I try to get up early to read.
• 1:05:07
  Speaker 1: I make up for lost time on the weekend. But
• 1:05:10
  Speaker 1: if it's not spent with a family, you'll probably find
• 1:05:12
  Speaker 1: me either reading history or the latest technology or or math.
• 1:05:17
  Speaker 1: Uh to keep abreast of technology trends. I don't care
• 1:05:21
  Speaker 1: as much of what I am reading as long as
• 1:05:22
  Speaker 1: I feel like I'm being intellectually um challenge and remaining
• 1:05:26
  Speaker 1: into actually curious. So you're still a runner, are you doing? Oh?
• 1:05:30
  Speaker 1: Just I just try to stay you know, just try
• 1:05:33
  Speaker 1: to stay fit. I realized in with every passing day
• 1:05:36
  Speaker 1: my metabolism is slower than the day before. So uh again.
• 1:05:41
  Speaker 1: I also find I'm actually better at research and creativity
• 1:05:44
  Speaker 1: the more I do work out, so I've gotten less
• 1:05:48
  Speaker 1: into the heavyweights like TRX, kettlebells. Bill McNab obviously, you know,
• 1:05:52
  Speaker 1: I know gentlemen of he turned me onto a lot
• 1:05:55
  Speaker 1: of different exercise. He's he's great, so I'm I should
• 1:05:58
  Speaker 1: ask him what's his next lady? You know exercise technique.
• 1:06:02
  Speaker 1: I'd become intrigued by two exercises that are so different.
• 1:06:07
  Speaker 1: One is rowing, oh my son rose, and the other
• 1:06:10
  Speaker 1: is boxing. Boxing. Yes, I have, I installed it. We
• 1:06:13
  Speaker 1: got we last last Christmas boxing down in our basement
• 1:06:18
  Speaker 1: of boxing bag. So speedbag or ahead no heavy bag. Yeah,
• 1:06:22
  Speaker 1: it hurts, it hurts the risk when you first start,
• 1:06:24
  Speaker 1: but it's worth It's a good I've been doing that
• 1:06:26
  Speaker 1: in the winter because sometimes you can't run on the
• 1:06:28
  Speaker 1: bekend with the ice. But yeah, it's like whatever you do,
• 1:06:32
  Speaker 1: as long as you diversify a little bit, keeps up
• 1:06:34
  Speaker 1: the excitement. A question I should have asked you earlier,
• 1:06:37
  Speaker 1: but I'm finding that there's some fascinating answers to this.
• 1:06:41
  Speaker 1: What was the year making model of your first car?
• 1:06:44
  Speaker 1: Oh Man, I was sixteen. My parents said, if you
• 1:06:49
  Speaker 1: get good enough grades, you can actually drive to school,
• 1:06:51
  Speaker 1: which was a big deal. It was a Chevy Cavalier White.
• 1:06:58
  Speaker 1: It's probably a eight six, a piece of crap. But
• 1:07:04
  Speaker 1: but two guys like you and I cars meant so
• 1:07:07
  Speaker 1: I was actually I don't think I don't think it
• 1:07:09
  Speaker 1: means the same thing. Yeah, but you know my parents
• 1:07:11
  Speaker 1: I give my parents, you know, they you know, I
• 1:07:13
  Speaker 1: was actually lucky, unfortunate to have my own car. I'm sixteen,
• 1:07:16
  Speaker 1: and that was nicer than my first well and my
• 1:07:18
  Speaker 1: dead But when my daddy always said, in institute such
• 1:07:20
  Speaker 1: a lesson. You have to pay for your own insurance
• 1:07:22
  Speaker 1: and you have to pay for all the gas. So
• 1:07:25
  Speaker 1: it's get a free rod. So we'll get a job.
• 1:07:27
  Speaker 1: And uh and by the way, you have to keep
• 1:07:28
  Speaker 1: up the grades while you do it, so that that's
• 1:07:30
  Speaker 1: quite interesting. So our final two questions. A millennial or
• 1:07:35
  Speaker 1: recent college grad comes up to you and says they're
• 1:07:37
  Speaker 1: interested in the career in finance. What sort of advice
• 1:07:40
  Speaker 1: would you give them. I go back to that I
• 1:07:42
  Speaker 1: said before read read read. I mean three hours a day,
• 1:07:45
  Speaker 1: everything that did that's going on in the profession, and
• 1:07:48
  Speaker 1: everything tangential to that practitioner, research books of the leading
• 1:07:53
  Speaker 1: authorities in the field. I mean creating new so in
• 1:07:56
  Speaker 1: my field, investment research or even portfolio management, Barry, if
• 1:07:59
  Speaker 1: we can stand in on the shoulders of what others
• 1:08:01
  Speaker 1: have written, that's the and so if you can just
• 1:08:05
  Speaker 1: have a good understanding what other smart people have commented about,
• 1:08:08
  Speaker 1: that is the context that allows you to incrementally perhaps
• 1:08:11
  Speaker 1: contribute to the debate. So read, read, read what I'd
• 1:08:14
  Speaker 1: be doing on both the math side and the history.
• 1:08:18
  Speaker 1: I think the one mistake the economics profession made pre
• 1:08:20
  Speaker 1: GFC is too much math, too little history. That makes
• 1:08:23
  Speaker 1: perfect sense. And our final question, what is it that
• 1:08:26
  Speaker 1: you know about the world of economics and investing today
• 1:08:30
  Speaker 1: that you wish you knew thirty years ago? I underestimated
• 1:08:34
  Speaker 1: the power of compounding. Really, I knew same was important
• 1:08:38
  Speaker 1: my parents. My dad turned me onto Vanguard Investing with
• 1:08:42
  Speaker 1: my summer law mowing and construction money. But uh, I
• 1:08:46
  Speaker 1: tell you this, I mean so, I tell you before
• 1:08:48
  Speaker 1: I had really learned the benefits of Vanguard Investing, I'm
• 1:08:53
  Speaker 1: down in grad school. I'm using I was using Amazon
• 1:08:55
  Speaker 1: as early. If you remember ordering Amazon ninety five, you
• 1:08:59
  Speaker 1: get a free coffee mug with a new book. I
• 1:09:00
  Speaker 1: had to write them to say stopped sending me called mugs.
• 1:09:04
  Speaker 1: I owned Amazon stock in and I sold it in
• 1:09:08
  Speaker 1: two thousand and one for like single digits. To this day,
• 1:09:11
  Speaker 1: I refused to I refused to calculate what I've lost,
• 1:09:15
  Speaker 1: but power of compounding sting invested into markets that was
• 1:09:18
  Speaker 1: somehow since I've learned at Vanguard, Joe, thank you so much.
• 1:09:21
  Speaker 1: This has been absolutely fascinating. We have been speaking with
• 1:09:25
  Speaker 1: Joe Davis, chief economist and UH chief cook and bottle
• 1:09:29
  Speaker 1: washer over at the Vanguard Group. If you enjoy this conversation,
• 1:09:34
  Speaker 1: well look up an intro Down an Inch on Apple
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• 1:09:39
  Speaker 1: hundred and fifty or so such conversations that we've held
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• 1:09:56
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• 1:10:12
  Speaker 1: our head of research. I'm Barry Ridholts. You've been listening
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