1
00:00:02,240 --> 00:00:06,800
Speaker 1: This is Masters in Business with Verry Ridholts on Boomberg Radio.

2
00:00:09,640 --> 00:00:12,440
Speaker 1: This week on the podcast, I have an extra special guest.

3
00:00:12,600 --> 00:00:16,040
Speaker 1: His name is Joe Davis. He is the chief economist

4
00:00:16,120 --> 00:00:20,800
Speaker 1: and global head of Investment Strategy at the giant five

5
00:00:20,840 --> 00:00:25,119
Speaker 1: trillion dollar Vanguard Group. If you are at all interested

6
00:00:25,280 --> 00:00:30,840
Speaker 1: in a very non traditional economic discussion, then you're gonna

7
00:00:30,840 --> 00:00:35,199
Speaker 1: find this conversation fascinating. We talk about global trade, but

8
00:00:35,479 --> 00:00:38,680
Speaker 1: not who's selling what and what tariffs are in the way.

9
00:00:38,760 --> 00:00:42,240
Speaker 1: We talk about the trade in ideas and the global

10
00:00:42,240 --> 00:00:47,839
Speaker 1: exchange of technology and how things like the Internet have

11
00:00:48,040 --> 00:00:55,400
Speaker 1: allowed the entire world to become richer, more productive, lowering

12
00:00:55,560 --> 00:01:01,160
Speaker 1: certain um negative aspects of economic growth, and really helping

13
00:01:01,200 --> 00:01:06,120
Speaker 1: to raise up the entire world economy and world standard

14
00:01:06,200 --> 00:01:10,080
Speaker 1: of living. This is a fascinating, wonky conversation that I

15
00:01:10,120 --> 00:01:15,040
Speaker 1: think you will find absolutely intriguing. So, with no further ado,

16
00:01:15,400 --> 00:01:23,720
Speaker 1: my conversation with the Vanguard Groups Joe Davis. My special

17
00:01:23,760 --> 00:01:27,360
Speaker 1: guest this week is Joe Davis. He is a principal

18
00:01:27,480 --> 00:01:30,959
Speaker 1: at Vanguard and is the firm's chief economist as well

19
00:01:31,000 --> 00:01:35,400
Speaker 1: as the global head of the Vanguard Investment Strategy Group.

20
00:01:35,640 --> 00:01:38,760
Speaker 1: He's also a member of the senior portfolio management team

21
00:01:39,360 --> 00:01:44,200
Speaker 1: up for Vanguard's fixed income group. Joe Davis, Welcome to Bloomberg.

22
00:01:44,480 --> 00:01:47,360
Speaker 1: Thanks Barry here. So I've been looking forward to having

23
00:01:47,360 --> 00:01:50,760
Speaker 1: this conversation with you because there are so many things

24
00:01:50,800 --> 00:01:54,080
Speaker 1: I want to go over with you about the state

25
00:01:54,120 --> 00:01:58,760
Speaker 1: of the economy and indexing and Vanguard. Tell us how

26
00:01:58,800 --> 00:02:01,760
Speaker 1: you found your way to Vanguard. It turns out you

27
00:02:01,800 --> 00:02:05,640
Speaker 1: were born very close to the Vanguard headquarters, so I

28
00:02:05,640 --> 00:02:09,560
Speaker 1: grew up literally ten minutes from Vanguard's building. I never

29
00:02:09,600 --> 00:02:12,080
Speaker 1: thought I would end up working at Vanguard. Uh, Like

30
00:02:12,120 --> 00:02:13,760
Speaker 1: a lot of things in life, I have my parents

31
00:02:13,840 --> 00:02:16,079
Speaker 1: the think for why I'm actually at Vanguard. So I'm

32
00:02:16,120 --> 00:02:18,480
Speaker 1: coming out of grad school do my own job search.

33
00:02:18,720 --> 00:02:20,320
Speaker 1: You know, I'm thirty one years old, So of course

34
00:02:20,360 --> 00:02:22,480
Speaker 1: I thought I knew everything, and you went to grad

35
00:02:22,560 --> 00:02:25,800
Speaker 1: school and duke okay, So I really wanted to go

36
00:02:25,840 --> 00:02:28,800
Speaker 1: to the private sector, not in academia. And I thought

37
00:02:28,880 --> 00:02:31,520
Speaker 1: I was going up to to New York City to

38
00:02:31,600 --> 00:02:34,000
Speaker 1: work on the South Side, And my dad pulls me

39
00:02:34,040 --> 00:02:36,800
Speaker 1: aside and says, hey, have you ever thought about applying

40
00:02:36,840 --> 00:02:39,440
Speaker 1: to to Vanguard. So, of course, again, I'm thirty one

41
00:02:39,440 --> 00:02:42,200
Speaker 1: I say, what Vanguard, that index company? They don't need

42
00:02:42,200 --> 00:02:44,919
Speaker 1: an economists and uh, he says, well, do you mind

43
00:02:44,919 --> 00:02:46,720
Speaker 1: if I take you your resume and give it to

44
00:02:46,760 --> 00:02:49,480
Speaker 1: someone over there, And turns out they were just starting

45
00:02:49,520 --> 00:02:54,000
Speaker 1: a research group to supplement uh Jack Bogel, who was

46
00:02:54,040 --> 00:02:58,000
Speaker 1: obviously continued to be a luminary in the field, and

47
00:02:58,200 --> 00:03:00,560
Speaker 1: uh I was. And so next you know, I'm interviewing

48
00:03:00,560 --> 00:03:03,560
Speaker 1: a Vanguard's two thousand and two, and uh I was

49
00:03:03,960 --> 00:03:06,960
Speaker 1: to this day. I was impressed with the talent of

50
00:03:07,000 --> 00:03:09,600
Speaker 1: the professionals. I'm at a Vanguard with with with no

51
00:03:09,720 --> 00:03:13,240
Speaker 1: egos and s And that's then. That's over fifteen years ago, Barry.

52
00:03:13,360 --> 00:03:17,160
Speaker 1: That's quite intriguing. So as I was preparing some standard

53
00:03:17,240 --> 00:03:20,519
Speaker 1: economic questions to talk to you about the Federal Reserve

54
00:03:20,560 --> 00:03:23,839
Speaker 1: and the yield curve and everybody's favorite indicators, I came

55
00:03:23,880 --> 00:03:28,760
Speaker 1: across a conversation that you had recently where your thirteen

56
00:03:28,840 --> 00:03:31,960
Speaker 1: year old daughter asked you the question, Hey, Dad, is

57
00:03:32,000 --> 00:03:35,240
Speaker 1: the world getting any better? That's kind of fascinating from

58
00:03:35,240 --> 00:03:38,200
Speaker 1: a thirteen year old. But my question for you is

59
00:03:38,640 --> 00:03:41,720
Speaker 1: what was your answer? Well, you know what, my my

60
00:03:41,800 --> 00:03:44,880
Speaker 1: instinct was. It depends and that's of course that's not

61
00:03:45,040 --> 00:03:48,960
Speaker 1: that's not satisfactory, UM, but his standard economic response. You know,

62
00:03:49,000 --> 00:03:51,240
Speaker 1: my my daughter really got me thinking. I remember sitting

63
00:03:51,240 --> 00:03:53,800
Speaker 1: in the kitchen table Barry, and I said to myself,

64
00:03:53,840 --> 00:03:55,720
Speaker 1: you know, I should know the answer to this question

65
00:03:55,760 --> 00:03:58,920
Speaker 1: pretty quickly, and I'm gonna fail seventh grade because that

66
00:03:59,000 --> 00:04:01,480
Speaker 1: was the question to a seven great essay. UM that

67
00:04:01,600 --> 00:04:05,560
Speaker 1: end up becoming a whole research project because we're I

68
00:04:05,640 --> 00:04:09,040
Speaker 1: zeroed in on, uh, is if the world's getting if

69
00:04:09,120 --> 00:04:11,080
Speaker 1: the world is going to get better, that means the

70
00:04:11,200 --> 00:04:13,880
Speaker 1: rate of innovation what we call the rate of productivity,

71
00:04:13,920 --> 00:04:16,680
Speaker 1: has to has to accelerate. And why anyone should care

72
00:04:16,720 --> 00:04:18,960
Speaker 1: about that is because then the standard of living for

73
00:04:19,000 --> 00:04:21,240
Speaker 1: people around the world's increasing. And we had that that

74
00:04:21,360 --> 00:04:25,680
Speaker 1: rate of increase has been declining since two thousand, long

75
00:04:25,720 --> 00:04:29,040
Speaker 1: before the global financial crisis. And and so we stumbled on,

76
00:04:29,240 --> 00:04:31,960
Speaker 1: you know, what is going to lead to higher rates

77
00:04:31,960 --> 00:04:34,960
Speaker 1: of growth? Innovation for you know, more inclusive growth across

78
00:04:35,000 --> 00:04:38,159
Speaker 1: the world, and something we didn't inspect the find we

79
00:04:38,200 --> 00:04:41,159
Speaker 1: actually we believe we found what potentially is the first

80
00:04:41,240 --> 00:04:46,159
Speaker 1: leading indicator for innovation that suggests just right now that

81
00:04:46,640 --> 00:04:50,080
Speaker 1: innovation may and growth may accelerate five or six years

82
00:04:50,080 --> 00:04:54,960
Speaker 1: in the future. So Stephen Pinker, linguists at Harvard wrote

83
00:04:54,960 --> 00:04:58,800
Speaker 1: a book, The Bitter Angels of Our Nature, and his

84
00:04:58,920 --> 00:05:02,400
Speaker 1: takeaway was, well, the headlines are just worse and worse.

85
00:05:02,880 --> 00:05:05,159
Speaker 1: But if you put aside the headlines and actually look

86
00:05:05,160 --> 00:05:11,640
Speaker 1: at the data, UH, infant mortality, UM, nutritional UM, lack

87
00:05:11,680 --> 00:05:17,880
Speaker 1: of nutrition and starvation, UH, capital crimes, war, UM. All

88
00:05:17,920 --> 00:05:19,640
Speaker 1: these things have been going down. I've been going down

89
00:05:19,680 --> 00:05:23,280
Speaker 1: for fifty years on a global basis. Why is it

90
00:05:23,360 --> 00:05:25,840
Speaker 1: that that is such a challenging question. Why does it

91
00:05:25,920 --> 00:05:29,600
Speaker 1: not feel like things are getting better when they clearly

92
00:05:29,600 --> 00:05:31,880
Speaker 1: are getting better everywhere? And I remember routing off some

93
00:05:31,920 --> 00:05:35,080
Speaker 1: of those statistics, uh, you know to my daughter, Um,

94
00:05:35,120 --> 00:05:38,680
Speaker 1: you know Steve's book. Hans Rosling for years also talked

95
00:05:38,680 --> 00:05:40,960
Speaker 1: about that great, great example. UM. I think part of

96
00:05:41,000 --> 00:05:43,800
Speaker 1: it is that those are slow moving trends, so we

97
00:05:43,880 --> 00:05:46,400
Speaker 1: just don't fixate on them because they're not moving up

98
00:05:46,400 --> 00:05:49,440
Speaker 1: and down very quickly. Um. Those are years and yeah,

99
00:05:49,560 --> 00:05:51,840
Speaker 1: years and decades. The other thing is, I I listen,

100
00:05:51,880 --> 00:05:53,400
Speaker 1: I I can't prove this beare I think part of

101
00:05:53,400 --> 00:05:56,160
Speaker 1: this is happiness is relative in life, Right, there's a

102
00:05:56,200 --> 00:05:59,360
Speaker 1: lot of well rout it depends the relative to you know,

103
00:05:59,440 --> 00:06:02,160
Speaker 1: so it's out to your people. I think you can

104
00:06:02,200 --> 00:06:05,479
Speaker 1: explain the paradox have said, you have, you know, general

105
00:06:05,480 --> 00:06:07,479
Speaker 1: trends in the world. A lot of trends are better,

106
00:06:07,560 --> 00:06:10,760
Speaker 1: lower violence, UH, increased wealth around the world. Look what's

107
00:06:10,760 --> 00:06:13,280
Speaker 1: happened in China. Yeah, you have rise in income inequality.

108
00:06:13,520 --> 00:06:15,520
Speaker 1: So that's where you can you can you can. I

109
00:06:15,560 --> 00:06:17,520
Speaker 1: think you can reconcile with some of this paradox by

110
00:06:17,520 --> 00:06:20,520
Speaker 1: saying that's where the relative matters as much as the absolute.

111
00:06:20,640 --> 00:06:23,919
Speaker 1: I don't that's what I justify that position, but I

112
00:06:23,960 --> 00:06:26,000
Speaker 1: think that has been lost sighted. But the fact is,

113
00:06:26,000 --> 00:06:28,760
Speaker 1: I think in the financial markets and as investors, we

114
00:06:28,839 --> 00:06:33,279
Speaker 1: focus more on UH corporate earnings growth those economic fundamentals

115
00:06:33,320 --> 00:06:37,080
Speaker 1: that perhaps me fall outside of GDP. So let's talk

116
00:06:37,120 --> 00:06:42,720
Speaker 1: about the productivity issue that you you mentioned. I so

117
00:06:42,880 --> 00:06:46,240
Speaker 1: I work in a space where productivity has been exploding

118
00:06:46,880 --> 00:06:50,159
Speaker 1: and so on a relative basis To answer to respond

119
00:06:50,200 --> 00:06:52,320
Speaker 1: to what you said earlier, it seems to me like

120
00:06:52,360 --> 00:06:57,640
Speaker 1: productivity growth is booming. Why do we not see productivity

121
00:06:57,640 --> 00:07:01,440
Speaker 1: growth throughout the whole economy? And is that a measurement

122
00:07:01,520 --> 00:07:05,080
Speaker 1: issue or is it a genuine lack of productivity problem. Yeah,

123
00:07:05,080 --> 00:07:07,920
Speaker 1: I think that there's there's three potential reasons why. And

124
00:07:07,920 --> 00:07:10,280
Speaker 1: again we should care because if proactivity is really going

125
00:07:10,320 --> 00:07:13,040
Speaker 1: to return, Bob Gordon's got that great book, The Rise

126
00:07:13,080 --> 00:07:15,520
Speaker 1: and Fall of American Growth, And you know, other than

127
00:07:15,560 --> 00:07:18,240
Speaker 1: the late nineties, we haven't seen a material pick up

128
00:07:18,280 --> 00:07:21,080
Speaker 1: in in proactivity. And again it feels all around us

129
00:07:21,640 --> 00:07:25,440
Speaker 1: very right, I mean, technological disruption, innovation, technology. It seems

130
00:07:25,440 --> 00:07:27,560
Speaker 1: like you should be there. So when it could be mismeasured,

131
00:07:27,760 --> 00:07:29,840
Speaker 1: I don't buy that argument. We've looked at some of it.

132
00:07:30,040 --> 00:07:33,000
Speaker 1: If it's mismeasured, it's second order. I mean GDP and

133
00:07:33,040 --> 00:07:36,240
Speaker 1: those short of statistics have always been mismeasured. Um. And

134
00:07:36,280 --> 00:07:38,720
Speaker 1: I've done a lot of economic historical work to to

135
00:07:38,720 --> 00:07:43,080
Speaker 1: to just you know, to to justify that that that position. Secondly, um,

136
00:07:43,160 --> 00:07:46,480
Speaker 1: is that it's were permanently. There's some making the argument,

137
00:07:46,560 --> 00:07:49,320
Speaker 1: some really smart people that I respect, making the argument.

138
00:07:49,360 --> 00:07:52,040
Speaker 1: I mean, you hear it in phrases of secular stagnation.

139
00:07:52,880 --> 00:07:56,000
Speaker 1: You hear it. Of all, ideas are harder to come by,

140
00:07:56,520 --> 00:08:00,240
Speaker 1: that that proactivity is permanently impaired. I don't buy that either.

141
00:08:00,320 --> 00:08:03,680
Speaker 1: The third one is I believe that um, that there's

142
00:08:03,680 --> 00:08:07,360
Speaker 1: an implementation phase that that the global economy is working

143
00:08:07,400 --> 00:08:11,160
Speaker 1: through again demographics acide. I'm talking about output per person,

144
00:08:11,320 --> 00:08:15,480
Speaker 1: income per person um that we will see material rise

145
00:08:15,520 --> 00:08:18,760
Speaker 1: in productivity. I can't tell you that the day or

146
00:08:18,800 --> 00:08:21,000
Speaker 1: the week, Barry, but our our work some what we've

147
00:08:21,000 --> 00:08:23,200
Speaker 1: done we can get into. We call the idea multiplier.

148
00:08:23,280 --> 00:08:26,640
Speaker 1: We believe is the world's first leading indicator of commercial

149
00:08:26,720 --> 00:08:31,000
Speaker 1: innovation that actually will show up on statistics. And we

150
00:08:31,080 --> 00:08:34,640
Speaker 1: believe that that is in the process of occurring, um.

151
00:08:34,960 --> 00:08:36,320
Speaker 1: But it's going to take a little bit of time.

152
00:08:36,360 --> 00:08:38,920
Speaker 1: And again that there's an historical analogy to this. In

153
00:08:38,960 --> 00:08:41,800
Speaker 1: the past two periods in long u s history over

154
00:08:41,840 --> 00:08:45,600
Speaker 1: two years, there was two periods in time at least

155
00:08:45,640 --> 00:08:48,160
Speaker 1: when productivity is as low as it is today, in

156
00:08:48,200 --> 00:08:51,480
Speaker 1: a period of profound technological disruption. It happened during the

157
00:08:51,720 --> 00:08:54,920
Speaker 1: mid nineteenth century when steam engines and locomotives were explaining

158
00:08:54,920 --> 00:08:57,880
Speaker 1: across the economy. But there was a ten of fifteen

159
00:08:57,960 --> 00:09:02,720
Speaker 1: year period after a financial crisis, ironically, when when growth

160
00:09:02,760 --> 00:09:06,320
Speaker 1: and productivity was at a standstill, and yet investment in

161
00:09:06,360 --> 00:09:08,960
Speaker 1: new technology was starting to pick up. So how much

162
00:09:08,960 --> 00:09:12,559
Speaker 1: of an impact does the financial crisis have on either

163
00:09:12,760 --> 00:09:16,920
Speaker 1: actual innovation or the measurement of innovation in the following decade. Well,

164
00:09:17,080 --> 00:09:19,480
Speaker 1: I believe in in in some of the work we've

165
00:09:19,480 --> 00:09:22,960
Speaker 1: done shows that most industrial revolutions, we can debate whether

166
00:09:23,000 --> 00:09:25,960
Speaker 1: there's been two, three, or four UM, they generally have

167
00:09:26,080 --> 00:09:28,880
Speaker 1: two broad phases. The first one is the first u

168
00:09:28,880 --> 00:09:31,000
Speaker 1: fouria that can last ten or twenty years. That's when

169
00:09:31,000 --> 00:09:36,120
Speaker 1: the first technology that the general purpose technology, steam engine, electricity,

170
00:09:36,440 --> 00:09:39,600
Speaker 1: the computer, when it's it's it's it's built and it's

171
00:09:39,679 --> 00:09:43,480
Speaker 1: introduced to the marketplace, think of routers and and and

172
00:09:43,640 --> 00:09:46,480
Speaker 1: hardware in the late nineties. That's the first phase. That

173
00:09:46,559 --> 00:09:50,560
Speaker 1: typically then happens a period of euphoria with that financial bubbles,

174
00:09:50,640 --> 00:09:55,120
Speaker 1: there's economic damage. UM. What I think is lost though

175
00:09:55,240 --> 00:09:58,480
Speaker 1: the more powerful phases the second phase, because what general

176
00:09:58,480 --> 00:10:02,680
Speaker 1: purpose technology changes the world when it changes business models

177
00:10:02,880 --> 00:10:05,800
Speaker 1: and it changes how companies do things that have nothing

178
00:10:05,840 --> 00:10:09,160
Speaker 1: to do with the original technology. And that's where UM

179
00:10:09,280 --> 00:10:12,760
Speaker 1: some call it now AI artificial intelligence. It's just effectively

180
00:10:13,280 --> 00:10:16,760
Speaker 1: computer software at a more advanced pace, that is the

181
00:10:16,760 --> 00:10:19,120
Speaker 1: more profound pace. And I think we're starting to enter

182
00:10:19,200 --> 00:10:22,040
Speaker 1: that UM and so that's where we will see the

183
00:10:22,559 --> 00:10:26,720
Speaker 1: productivity gains is is all the other occupations and industries

184
00:10:26,760 --> 00:10:32,720
Speaker 1: across the country using that sort of computer technology. Quite fascinating. Uh,

185
00:10:32,840 --> 00:10:37,000
Speaker 1: Let's talk a little bit about innovation and creativity. Following

186
00:10:37,040 --> 00:10:40,679
Speaker 1: the dot com bust, you began hunting for a formula

187
00:10:41,000 --> 00:10:44,200
Speaker 1: to determine what it is that drives innovation in the

188
00:10:44,240 --> 00:10:49,000
Speaker 1: world as well as human creativity. You called it the

189
00:10:49,040 --> 00:10:52,720
Speaker 1: ideas multiplier. To discuss that research, Well, we were, you know,

190
00:10:52,760 --> 00:10:55,200
Speaker 1: we we were trying to answer the fundamental question Barry.

191
00:10:55,320 --> 00:10:57,720
Speaker 1: And again we've we've we fully answered it, but we

192
00:10:57,760 --> 00:11:00,400
Speaker 1: I think we have better insight into explaining this paradocks

193
00:11:00,440 --> 00:11:03,920
Speaker 1: in the world low productivity and measure rates of innovation. Yeah,

194
00:11:03,960 --> 00:11:07,640
Speaker 1: we got technological disruption all around us. And where our

195
00:11:07,679 --> 00:11:11,400
Speaker 1: research lead us is to say what ultimately leads to uh,

196
00:11:11,520 --> 00:11:14,800
Speaker 1: profound increases in economic growth, whether it's in China the US,

197
00:11:15,160 --> 00:11:18,400
Speaker 1: it's that genuine rate of innovation, right, And and what

198
00:11:18,440 --> 00:11:21,840
Speaker 1: we did is we looked at say, well, if if

199
00:11:21,880 --> 00:11:24,880
Speaker 1: if prota it's low or high. Ultimately what that means

200
00:11:25,000 --> 00:11:28,120
Speaker 1: is the the the amount or the number of valuable

201
00:11:28,160 --> 00:11:31,960
Speaker 1: ideas being created world. Ideas for a new widget, new computer,

202
00:11:32,160 --> 00:11:35,920
Speaker 1: new business model, new product, that has to be the

203
00:11:36,000 --> 00:11:39,600
Speaker 1: pressed now. Um, and if we can, if we can

204
00:11:39,640 --> 00:11:42,200
Speaker 1: look at what is occurring in the world and the

205
00:11:42,240 --> 00:11:46,079
Speaker 1: globalization the trade of ideas across countries, then we can

206
00:11:46,080 --> 00:11:49,160
Speaker 1: get a sense of where the new ideas will come from, if, if,

207
00:11:49,240 --> 00:11:51,240
Speaker 1: if at all, if it will they'll accelerate. So so

208
00:11:51,360 --> 00:11:53,160
Speaker 1: let me try to unpack that a little bit, because

209
00:11:53,240 --> 00:11:59,400
Speaker 1: that's a really loaded multipart observation. First, my assumption has

210
00:11:59,400 --> 00:12:04,040
Speaker 1: always been and new ideas bubble up constantly, and while

211
00:12:04,080 --> 00:12:06,760
Speaker 1: we may not know if it's coming from Boston or

212
00:12:06,800 --> 00:12:12,720
Speaker 1: San Francisco or New Delhi or Beijing, human ingenuity is

213
00:12:12,760 --> 00:12:15,800
Speaker 1: constantly trying new things and putting different things together. But

214
00:12:15,920 --> 00:12:20,320
Speaker 1: what you're implying is new ideas EBB and flow in

215
00:12:20,360 --> 00:12:24,640
Speaker 1: a cycle of sorts. Yeah, I mean, even it's a

216
00:12:24,640 --> 00:12:27,320
Speaker 1: fashionating there's like long waves. Now, you can smooth any

217
00:12:27,320 --> 00:12:29,880
Speaker 1: time series and you can find this but long raise

218
00:12:29,920 --> 00:12:32,000
Speaker 1: of innovation through time. In fact, in the United States,

219
00:12:32,000 --> 00:12:34,520
Speaker 1: we've had at least nine periods when productivity on a

220
00:12:34,559 --> 00:12:37,679
Speaker 1: ten year basis has been zero really ten you now,

221
00:12:38,320 --> 00:12:41,600
Speaker 1: just because it's it's been zero nine previous times. Doesn't

222
00:12:41,640 --> 00:12:43,640
Speaker 1: mean we're gonna rebound out of this one, because that's

223
00:12:43,640 --> 00:12:46,040
Speaker 1: where we're at in the previous ten years. Zero. Now,

224
00:12:46,040 --> 00:12:49,880
Speaker 1: when you say zero productivity on a trailing basis right on,

225
00:12:50,080 --> 00:12:52,120
Speaker 1: I'm talking to trend forget that. So what happens is

226
00:12:52,120 --> 00:12:55,440
Speaker 1: there's a giant drop in productivity because of all the

227
00:12:55,520 --> 00:12:58,719
Speaker 1: job to myself included, you know I did to Going

228
00:12:58,760 --> 00:13:00,640
Speaker 1: back to my daughter's question, I have a good answer

229
00:13:00,679 --> 00:13:04,880
Speaker 1: because economists generally treat the productivity as a residual, meaning

230
00:13:04,880 --> 00:13:07,160
Speaker 1: we don't really know what what why it goes up

231
00:13:07,160 --> 00:13:10,000
Speaker 1: and down through time because ultimately it leads to where

232
00:13:10,000 --> 00:13:12,559
Speaker 1: our new ideas coming from. So how do you how

233
00:13:12,559 --> 00:13:15,040
Speaker 1: do you answer where new ideas are coming from? So

234
00:13:15,080 --> 00:13:18,679
Speaker 1: what we started looking at is what drives when the

235
00:13:18,760 --> 00:13:22,560
Speaker 1: rates of idea creation accelerate and decelerate through time. And

236
00:13:22,600 --> 00:13:25,680
Speaker 1: what we did is is we actually we actually traced

237
00:13:26,360 --> 00:13:29,920
Speaker 1: the creation of every valuable idea in the world over

238
00:13:29,920 --> 00:13:32,360
Speaker 1: the past forty years. It was over two billion records.

239
00:13:32,679 --> 00:13:34,200
Speaker 1: And what I mean by that is we care not

240
00:13:34,320 --> 00:13:36,800
Speaker 1: just by about some idea being created, because there's a

241
00:13:36,840 --> 00:13:39,240
Speaker 1: lot of quite frank, a lot of bad ideas. We

242
00:13:39,280 --> 00:13:42,880
Speaker 1: want to care about. Can we trace the spawning and

243
00:13:43,240 --> 00:13:47,680
Speaker 1: spreading of valuable ideas, think of things like the Internet,

244
00:13:47,720 --> 00:13:49,880
Speaker 1: but things that even are smaller in scale, which create

245
00:13:49,920 --> 00:13:53,160
Speaker 1: new businesses, new opportunities. And we looked around the world

246
00:13:53,320 --> 00:13:55,800
Speaker 1: and what we found is actually the most powerful part

247
00:13:55,840 --> 00:13:59,200
Speaker 1: of globalization, because globalization is on their attack with trade,

248
00:13:59,640 --> 00:14:02,520
Speaker 1: is the rate of ideas. Right, the fact that there's

249
00:14:02,600 --> 00:14:05,679
Speaker 1: more knowledge and ideas being created in China, which is

250
00:14:05,679 --> 00:14:09,319
Speaker 1: actually now leading to further additional ideas in the United

251
00:14:09,320 --> 00:14:12,360
Speaker 1: States and vice versa. And so what we found is

252
00:14:13,080 --> 00:14:15,760
Speaker 1: uh that that is what we call the idea multiplier.

253
00:14:15,800 --> 00:14:18,800
Speaker 1: How many future ideas are created by one good idea

254
00:14:19,080 --> 00:14:23,160
Speaker 1: in that ratio was roughly forty two one one. It

255
00:14:23,200 --> 00:14:26,400
Speaker 1: picked up in it actually told us, had we had

256
00:14:26,440 --> 00:14:30,080
Speaker 1: the data back, that there was something coming five years

257
00:14:30,160 --> 00:14:33,200
Speaker 1: later in the computer industry. It was called now the Internet.

258
00:14:33,800 --> 00:14:36,920
Speaker 1: Because the rate of ideas and being discussed in academia

259
00:14:36,920 --> 00:14:40,160
Speaker 1: and patent applications in academic research, which is the signals

260
00:14:40,200 --> 00:14:42,480
Speaker 1: that's where the data we were using two billion records.

261
00:14:42,880 --> 00:14:46,080
Speaker 1: You could see that sort of high energy state in

262
00:14:46,120 --> 00:14:49,360
Speaker 1: those fields, and it's been dormant for the past ten years,

263
00:14:49,640 --> 00:14:51,720
Speaker 1: which I think helps to rectify some of this what

264
00:14:51,800 --> 00:14:54,120
Speaker 1: some call the new normal is because the rate of

265
00:14:54,240 --> 00:14:58,680
Speaker 1: new influential ideas commercial ideas has kind of plateaued around

266
00:14:58,720 --> 00:15:02,000
Speaker 1: twos to one, and you're and you're suggesting that this

267
00:15:02,040 --> 00:15:05,160
Speaker 1: is cyclical and temporary and down the road. Well, what

268
00:15:05,280 --> 00:15:07,360
Speaker 1: we just picked up is so the data and we

269
00:15:07,360 --> 00:15:09,120
Speaker 1: were I was shocked to find. In fact, we had

270
00:15:09,160 --> 00:15:12,440
Speaker 1: the team crunch at four different times um a lot

271
00:15:12,440 --> 00:15:14,400
Speaker 1: of that. What we found is now just in the

272
00:15:14,440 --> 00:15:18,360
Speaker 1: past year, that idea multiplier went from two hundred to

273
00:15:18,440 --> 00:15:21,800
Speaker 1: one to over four hundred to one. So, in other words,

274
00:15:21,840 --> 00:15:25,560
Speaker 1: this is now starting to leading indicator that this idea multiplier,

275
00:15:25,560 --> 00:15:27,560
Speaker 1: when you look at its rate of change, tends to

276
00:15:27,640 --> 00:15:30,640
Speaker 1: lead actual productivity growth four or five years in the future.

277
00:15:30,680 --> 00:15:33,040
Speaker 1: I know it sounds crazy, but the ideas that we're

278
00:15:33,040 --> 00:15:37,240
Speaker 1: tracing in our leading indicator, our ideas in academic research,

279
00:15:37,280 --> 00:15:41,200
Speaker 1: medical research, it's patent applications and how they're being cited.

280
00:15:41,560 --> 00:15:43,880
Speaker 1: Every journal and every book that has ever been written

281
00:15:43,960 --> 00:15:46,160
Speaker 1: over the past forty years. We look at all those ideas,

282
00:15:46,200 --> 00:15:48,720
Speaker 1: and not only that, all the citations of all that

283
00:15:48,800 --> 00:15:51,200
Speaker 1: research and what ideas they are citing. And when you

284
00:15:51,240 --> 00:15:53,440
Speaker 1: look at all that data. You can then identify what

285
00:15:53,480 --> 00:15:56,600
Speaker 1: are influential ideas that are spreading. And what we found,

286
00:15:56,600 --> 00:15:59,520
Speaker 1: to my shock, is that there was five fields we've

287
00:15:59,520 --> 00:16:02,800
Speaker 1: found out that have the higher idea multiplier than what

288
00:16:02,840 --> 00:16:08,120
Speaker 1: the computer technology industry had. In those five are in order.

289
00:16:08,160 --> 00:16:11,160
Speaker 1: One is around materials. It may have to do with batteries.

290
00:16:11,200 --> 00:16:14,440
Speaker 1: It couldn't, So I can't batteries. I can't. I cannot

291
00:16:14,440 --> 00:16:16,840
Speaker 1: tell you what game changing ideas will occur, but I

292
00:16:16,840 --> 00:16:18,920
Speaker 1: can we can have some sense of where the fields are.

293
00:16:19,680 --> 00:16:21,800
Speaker 1: Just just look here in Manhattan. There are now high

294
00:16:21,920 --> 00:16:26,120
Speaker 1: rises that are these tiny skinny pencil bigger than the

295
00:16:26,120 --> 00:16:29,600
Speaker 1: Empire State building. The only reason that exists is the

296
00:16:29,600 --> 00:16:33,440
Speaker 1: technology for the spines of those buildings. It's no longer steel.

297
00:16:33,520 --> 00:16:36,720
Speaker 1: It's a form of carbon graphite, the carbon file that

298
00:16:36,760 --> 00:16:40,520
Speaker 1: you can make lighter and smaller and stronger. You couldn't

299
00:16:40,520 --> 00:16:43,520
Speaker 1: have built that. So I tell my daughters the three

300
00:16:43,600 --> 00:16:45,800
Speaker 1: leads that, so it's three jumped again. I have a

301
00:16:45,880 --> 00:16:51,640
Speaker 1: higher idea multiplier today than computers did. Material science, material sciences.

302
00:16:51,680 --> 00:16:54,240
Speaker 1: One second is that actually I'll give you four second

303
00:16:54,280 --> 00:16:58,800
Speaker 1: is actually oncology. The funny enough cancer, incredible progress. Um,

304
00:16:58,840 --> 00:17:01,440
Speaker 1: that's encouraging for my personal So we will be cancer

305
00:17:01,480 --> 00:17:03,480
Speaker 1: in our lifetime. Is that that I don't know, I

306
00:17:03,480 --> 00:17:06,560
Speaker 1: don't know, I know, yeah, yeah, I would not say that.

307
00:17:06,760 --> 00:17:12,200
Speaker 1: The third is actually around agriculture, plant sciences increasing yield,

308
00:17:12,240 --> 00:17:15,680
Speaker 1: increasing that again we you know we I don't. I'm

309
00:17:15,720 --> 00:17:17,760
Speaker 1: not good enough or smart to tell you exactly what

310
00:17:17,920 --> 00:17:20,240
Speaker 1: new product will come out, but there's something big in

311
00:17:20,280 --> 00:17:24,200
Speaker 1: the pipeline. A few years ago, Monsanto patented the ability

312
00:17:24,280 --> 00:17:27,640
Speaker 1: to create rice that was salt water resistant. So if

313
00:17:27,680 --> 00:17:30,399
Speaker 1: you're in parts of let's call India and Pakistan and

314
00:17:30,440 --> 00:17:33,480
Speaker 1: Malaysia where it's the staple crop, but there are frequent

315
00:17:33,600 --> 00:17:38,600
Speaker 1: floodings which can destroy regular most crops are sensitive to salt.

316
00:17:38,960 --> 00:17:41,520
Speaker 1: This is so fascinating. And then the largest one that

317
00:17:41,560 --> 00:17:45,320
Speaker 1: has by far the highest multiplier is is genetics and

318
00:17:45,320 --> 00:17:48,160
Speaker 1: genomics research. Really yeah, I mean it's often makes sense,

319
00:17:48,480 --> 00:17:50,240
Speaker 1: but it's off the chart. I mean, it's it's over

320
00:17:50,320 --> 00:17:52,960
Speaker 1: two x where computers were again just a you know,

321
00:17:53,040 --> 00:17:56,160
Speaker 1: relative comparison, because what's an idea multiplier? Again, we're introducing

322
00:17:56,240 --> 00:18:00,120
Speaker 1: new concepts in this debate. It's effectively you know that

323
00:17:59,840 --> 00:18:02,359
Speaker 1: that's in gine next and ironically, did you see how

324
00:18:02,359 --> 00:18:05,720
Speaker 1: I'm I did not mention AI in any of the fields.

325
00:18:05,760 --> 00:18:09,160
Speaker 1: You did not. That's correct, because what's happening is AI

326
00:18:09,280 --> 00:18:13,200
Speaker 1: is incredibly important. I'll call it Brawley computer technology, digital technology.

327
00:18:13,320 --> 00:18:15,680
Speaker 1: They are being used by all these industries. That's a

328
00:18:15,760 --> 00:18:18,720
Speaker 1: general purpose technology. The ultimate new game change on ideas

329
00:18:18,760 --> 00:18:21,439
Speaker 1: will come out, I believe from one of those and

330
00:18:21,520 --> 00:18:24,200
Speaker 1: not more of those fields I just mentioned. But they

331
00:18:24,240 --> 00:18:25,920
Speaker 1: perhaps could not have come up with some of those

332
00:18:25,960 --> 00:18:29,719
Speaker 1: answer applications without computer. Probably we probably couldn't perhaps do

333
00:18:29,800 --> 00:18:32,480
Speaker 1: this podcast without the computer and soft technology that you

334
00:18:32,480 --> 00:18:34,560
Speaker 1: have today. We could. It would just be two people

335
00:18:34,560 --> 00:18:37,280
Speaker 1: having a cup of coffee. That's what the technology allows

336
00:18:37,359 --> 00:18:39,800
Speaker 1: us to do. So I have to ask you a

337
00:18:39,880 --> 00:18:43,440
Speaker 1: question about one of those titles, Global Head of Vanguard

338
00:18:43,480 --> 00:18:46,399
Speaker 1: Investment Strategy. What does this group? What does it do?

339
00:18:47,160 --> 00:18:50,080
Speaker 1: Why does Vanguard have a global head of Investment Strategy?

340
00:18:50,119 --> 00:18:56,159
Speaker 1: And thanks Perry ultimately thought leadership. So our job, the

341
00:18:56,200 --> 00:18:58,840
Speaker 1: Investment Strategy Group's job. It's a group in in existence

342
00:18:58,920 --> 00:19:02,879
Speaker 1: roughly fifteen years. Um, it's actually the group I was

343
00:19:02,960 --> 00:19:06,240
Speaker 1: hired into. And um, you know, our job is to

344
00:19:06,440 --> 00:19:10,760
Speaker 1: is to help investors be successful and help them, UH,

345
00:19:11,000 --> 00:19:12,960
Speaker 1: provide them with the perspective on the problems they're trying

346
00:19:13,000 --> 00:19:15,440
Speaker 1: to solve. So if it is what is Vanguard think

347
00:19:15,520 --> 00:19:19,439
Speaker 1: dot dot dot And if the next word or phrases

348
00:19:19,960 --> 00:19:21,760
Speaker 1: what's our view on the long term trends in the

349
00:19:21,760 --> 00:19:24,480
Speaker 1: economy and what are reasonable expected returns? That would be

350
00:19:24,560 --> 00:19:27,359
Speaker 1: Investment Strategy group. If it would be on what are

351
00:19:27,440 --> 00:19:32,719
Speaker 1: viable retirement income and UH an investor behavior concerns and issues, UH,

352
00:19:32,760 --> 00:19:34,639
Speaker 1: this would be that group. It would be what's the

353
00:19:34,760 --> 00:19:38,560
Speaker 1: role of an asset or SEBASTA class factors commodity of

354
00:19:38,600 --> 00:19:41,200
Speaker 1: what's that role in the portfolio. We would help through

355
00:19:41,280 --> 00:19:45,919
Speaker 1: research as well as computer analytics UH to help investors

356
00:19:46,000 --> 00:19:49,800
Speaker 1: or our internal business partners, those that provide advice, those

357
00:19:49,840 --> 00:19:53,919
Speaker 1: that provide counsel to advisors, institutions, or individual investors. We

358
00:19:53,960 --> 00:19:56,240
Speaker 1: would help them through the research that we conduct. So

359
00:19:56,280 --> 00:19:59,840
Speaker 1: we're ultimately a research arm of the company UM, but

360
00:20:00,200 --> 00:20:03,239
Speaker 1: increasingly doing a lot through computer development as well as

361
00:20:03,240 --> 00:20:07,440
Speaker 1: speaking the clients UH and prospects on the road. So

362
00:20:07,520 --> 00:20:09,560
Speaker 1: what I'm not hearing in the list of things that

363
00:20:09,640 --> 00:20:13,360
Speaker 1: this group does is you're not forecasting the economy. You're

364
00:20:13,359 --> 00:20:18,240
Speaker 1: not forecasting the market. You're not making recommendations to rotate

365
00:20:18,320 --> 00:20:22,960
Speaker 1: out of this sector into a different sector. Not unexpected

366
00:20:23,400 --> 00:20:26,000
Speaker 1: from the Vanguard group. Who what is it about two

367
00:20:26,080 --> 00:20:29,159
Speaker 1: thirds of the assets of Broadly invest I'll I'll tell

368
00:20:29,200 --> 00:20:31,439
Speaker 1: you when I when I first came to Vanguard, and

369
00:20:31,760 --> 00:20:35,399
Speaker 1: I'll never forget the question was why does Vanguard need

370
00:20:35,400 --> 00:20:37,879
Speaker 1: an economist? It's still a good question I get asked.

371
00:20:38,040 --> 00:20:43,360
Speaker 1: So I think ultimately because um, for two reasons. One

372
00:20:43,480 --> 00:20:45,720
Speaker 1: is ultimately, asset allocation, which we all know is the

373
00:20:45,760 --> 00:20:48,960
Speaker 1: most important decision any investor has to make. Ultimately is

374
00:20:49,000 --> 00:20:52,919
Speaker 1: a function of the expected returns and volatilities you assume

375
00:20:53,000 --> 00:20:55,760
Speaker 1: for that portfolio. Now, you can use long run history,

376
00:20:56,359 --> 00:21:01,200
Speaker 1: but why should you do it? Our themes different? Uh Um. Secondly,

377
00:21:01,520 --> 00:21:03,960
Speaker 1: so that's important, and so how do you think through

378
00:21:04,320 --> 00:21:07,720
Speaker 1: forming the sort of viable return and risk expectations. I

379
00:21:07,720 --> 00:21:09,800
Speaker 1: think the job of our our our team is to

380
00:21:09,880 --> 00:21:12,879
Speaker 1: help do that in a reasonable way. And secondly is

381
00:21:12,920 --> 00:21:15,480
Speaker 1: to convey the risk in the marketplace to help investors

382
00:21:15,480 --> 00:21:18,600
Speaker 1: make decisions on their uncertainty. I'm very proud of our framework.

383
00:21:18,680 --> 00:21:21,919
Speaker 1: You know, we refuse to release short term point forecast.

384
00:21:23,359 --> 00:21:26,000
Speaker 1: I we we have a mantra At Vanguard we will

385
00:21:26,040 --> 00:21:29,639
Speaker 1: shall not produce point forecast. We can produce forecast. I

386
00:21:29,640 --> 00:21:32,080
Speaker 1: think that's helpful if we show the range of distributions.

387
00:21:32,080 --> 00:21:35,040
Speaker 1: Our job is too in a very statistical, rigorous way,

388
00:21:35,560 --> 00:21:38,639
Speaker 1: what is the range of expected returns or outcomes for

389
00:21:38,720 --> 00:21:42,399
Speaker 1: the markets, for the economy, for the assets that we

390
00:21:42,440 --> 00:21:46,360
Speaker 1: care about. But that probabilistic approach is very different than

391
00:21:46,960 --> 00:21:51,400
Speaker 1: so really the question isn't what does Vanguard have an

392
00:21:51,400 --> 00:21:55,879
Speaker 1: economist the chief economist? Really the question is how is

393
00:21:55,960 --> 00:21:59,879
Speaker 1: Vanguard's chief economists different from the typical chief economists and

394
00:22:00,000 --> 00:22:02,240
Speaker 1: its Wall Street firms? Because that's really and I and

395
00:22:02,280 --> 00:22:04,639
Speaker 1: I respect many of my colleagues, Um, you know, I

396
00:22:04,920 --> 00:22:08,240
Speaker 1: read their research. I'd say, you know where we where

397
00:22:08,280 --> 00:22:10,359
Speaker 1: we differ is is in the is in the shift

398
00:22:10,440 --> 00:22:13,080
Speaker 1: of our horizon and where we focus on so we

399
00:22:13,200 --> 00:22:15,800
Speaker 1: spend For example, I I tell my team we should

400
00:22:15,800 --> 00:22:18,280
Speaker 1: not be spending much time trying to divine what the

401
00:22:18,359 --> 00:22:21,640
Speaker 1: latest GDP number will be. We care about it will

402
00:22:21,680 --> 00:22:24,359
Speaker 1: give a high level glance, but we care more about

403
00:22:24,480 --> 00:22:30,560
Speaker 1: investigating longer term trends than such as technology, globalization, demographics, debt.

404
00:22:30,680 --> 00:22:33,639
Speaker 1: Why we care about that, because that ultimately change alter

405
00:22:33,800 --> 00:22:37,520
Speaker 1: the trend for growth for short term interest rates, where

406
00:22:37,640 --> 00:22:39,920
Speaker 1: the building block for all expected returns and the risk

407
00:22:39,960 --> 00:22:44,200
Speaker 1: premiums you and I hope to harvest over our investment horizon.

408
00:22:44,320 --> 00:22:47,200
Speaker 1: So um, not to say those other exercise aren't important,

409
00:22:47,200 --> 00:22:49,480
Speaker 1: but we focus much more in the longer term trends

410
00:22:49,720 --> 00:22:53,240
Speaker 1: and the risk the development of China. How that's altering

411
00:22:53,280 --> 00:22:55,960
Speaker 1: the relationship with the US rather than just the data

412
00:22:56,000 --> 00:22:58,320
Speaker 1: flow as I call day to day, week to week.

413
00:22:58,359 --> 00:23:01,600
Speaker 1: I I think you economys should not spend as much

414
00:23:01,640 --> 00:23:04,000
Speaker 1: time as we do at times on on those sort

415
00:23:04,000 --> 00:23:06,440
Speaker 1: of short term signals. So when you're talking about trends,

416
00:23:06,480 --> 00:23:10,000
Speaker 1: you're not talking about quarters and years. You're talking about

417
00:23:10,200 --> 00:23:14,199
Speaker 1: decades long, secular trends that are very sign now to

418
00:23:14,240 --> 00:23:16,199
Speaker 1: help the you know, to influence. It's just an input

419
00:23:16,240 --> 00:23:18,359
Speaker 1: to our performid management team on the fixed income side,

420
00:23:18,359 --> 00:23:21,320
Speaker 1: obviously their active bond managers. Our view on the Federal

421
00:23:21,359 --> 00:23:24,639
Speaker 1: reserve matters, our view on growth, what's the risk of recession.

422
00:23:24,720 --> 00:23:27,400
Speaker 1: We will estimate all those We don't tend to publish

423
00:23:27,400 --> 00:23:30,760
Speaker 1: them in high frequency externally for clients, but it's part

424
00:23:30,800 --> 00:23:33,000
Speaker 1: of the active management process. But again it's all in

425
00:23:33,000 --> 00:23:36,040
Speaker 1: that distributional setting not talked to you before, Barry. We're

426
00:23:36,040 --> 00:23:39,320
Speaker 1: trying to and this is just as hard the one question.

427
00:23:39,320 --> 00:23:41,440
Speaker 1: One one problem is not easier solve than the others.

428
00:23:41,720 --> 00:23:43,639
Speaker 1: We're just trying to focus if we can now the

429
00:23:43,680 --> 00:23:45,879
Speaker 1: sort of trend and have better sense. I'll give you

430
00:23:45,880 --> 00:23:48,920
Speaker 1: an example. For ten years, we have not been concerned

431
00:23:48,960 --> 00:23:52,040
Speaker 1: of a rapid increasing core inflation in the U S

432
00:23:52,119 --> 00:23:54,159
Speaker 1: or an almost any other market. One of the reasons

433
00:23:54,240 --> 00:23:56,520
Speaker 1: why we looked at the role of technology and how

434
00:23:56,560 --> 00:24:00,399
Speaker 1: that is depressing. We quantified the role of tech knowledging

435
00:24:00,440 --> 00:24:03,480
Speaker 1: digital computer is actually probably subtracting fifty basis points a

436
00:24:03,560 --> 00:24:06,800
Speaker 1: year from core inflation. So that matters because that gets

437
00:24:06,840 --> 00:24:09,480
Speaker 1: to what are reasonable expectations for the Federal Reserve, what

438
00:24:09,520 --> 00:24:11,840
Speaker 1: are reasonable expectations for long term tenure or for the

439
00:24:11,880 --> 00:24:14,880
Speaker 1: tenure Treasury. Again, we will never have a crystal ball.

440
00:24:14,920 --> 00:24:16,480
Speaker 1: Our job is to say what are the reson what

441
00:24:16,520 --> 00:24:19,440
Speaker 1: are the factors helping to drive these longer term trends.

442
00:24:19,760 --> 00:24:23,320
Speaker 1: And I'm proud of you know. That's where our marginal hour,

443
00:24:23,880 --> 00:24:26,359
Speaker 1: our marginal dollar is spent is trying to get a

444
00:24:26,920 --> 00:24:28,920
Speaker 1: glean a little bit more inside and as longer terms.

445
00:24:28,960 --> 00:24:32,080
Speaker 1: So let's stay with the longer term trend with inflation

446
00:24:32,960 --> 00:24:37,960
Speaker 1: deflationary forces such as UM manufacturing economies of scale coming

447
00:24:37,960 --> 00:24:41,640
Speaker 1: out of places like China but also India and Turkey

448
00:24:41,640 --> 00:24:45,399
Speaker 1: and Vietnam and elsewhere. UM. But that's offset from some

449
00:24:45,480 --> 00:24:49,440
Speaker 1: of the longer term trends on things like education and healthcare,

450
00:24:49,440 --> 00:24:52,520
Speaker 1: which have been way above average. How do you look

451
00:24:52,560 --> 00:24:55,000
Speaker 1: at that trend and what does that do to the

452
00:24:55,080 --> 00:24:58,600
Speaker 1: overall inflation picture and and everything else? So I think

453
00:24:58,600 --> 00:25:00,880
Speaker 1: two things. One thing that's been in statistically we could

454
00:25:00,920 --> 00:25:03,119
Speaker 1: you know, I could show you it's irony. One of

455
00:25:03,160 --> 00:25:06,960
Speaker 1: the reasons why inflation it's although possible, is unlikely to

456
00:25:07,080 --> 00:25:10,679
Speaker 1: rise maturally in urin eyes lifetime, is because you and

457
00:25:10,720 --> 00:25:13,560
Speaker 1: I and everyone else in the marketplace believes that it won't.

458
00:25:14,119 --> 00:25:18,080
Speaker 1: It's inflationd So economists generally talk about anchored inflation expectations

459
00:25:18,119 --> 00:25:21,120
Speaker 1: really surround us, Like how anchored inflation expectations? Right? It's

460
00:25:21,119 --> 00:25:25,000
Speaker 1: the tips markets breaking inflation. Central bankers will use well

461
00:25:25,040 --> 00:25:28,360
Speaker 1: anchored inflation expectations. Really, what this matters is is that

462
00:25:28,400 --> 00:25:31,280
Speaker 1: we we believe that we believe in the federal reserves

463
00:25:31,320 --> 00:25:34,960
Speaker 1: credibility and achieving a roughly two percent, and so inflation

464
00:25:35,040 --> 00:25:38,480
Speaker 1: expectations matter, which means it's less likely to core inflation

465
00:25:38,520 --> 00:25:41,400
Speaker 1: to go above it or blow it. And now you

466
00:25:41,480 --> 00:25:44,320
Speaker 1: overlay that with the trends and technology, and we have

467
00:25:44,440 --> 00:25:48,320
Speaker 1: long believed that generating two percent inflation in a digital

468
00:25:48,359 --> 00:25:50,879
Speaker 1: world it's just tougher to do. Is it possible? Clearly

469
00:25:50,880 --> 00:25:53,720
Speaker 1: if you go to Argentina, very easy to get well,

470
00:25:53,720 --> 00:25:56,200
Speaker 1: but there's a but that's because they have very poor

471
00:25:56,200 --> 00:26:00,000
Speaker 1: inflation psychology, and so Japan of anything they have yet

472
00:26:00,119 --> 00:26:04,480
Speaker 1: is this day to break that negative or low inflation psychology.

473
00:26:04,720 --> 00:26:07,080
Speaker 1: The federal reserves to their credit, and I think Americans

474
00:26:07,080 --> 00:26:10,439
Speaker 1: as a as a marketplace, we've generally zero didn't on

475
00:26:10,440 --> 00:26:13,879
Speaker 1: that two So putting aside the hyper inflation in Venezuela

476
00:26:14,359 --> 00:26:18,119
Speaker 1: and the deflation in Japan. Um, and let's talk about

477
00:26:19,040 --> 00:26:21,879
Speaker 1: the challenge of reaching two percent in places like Europe

478
00:26:21,880 --> 00:26:26,720
Speaker 1: in America. What does this tell us about wages going forward?

479
00:26:26,960 --> 00:26:30,840
Speaker 1: We've had thirty years of fairly flat net of inflation,

480
00:26:31,200 --> 00:26:35,240
Speaker 1: thirty years of flat real wage gains. What what can

481
00:26:35,320 --> 00:26:38,280
Speaker 1: workers expect going forward? Well, I think modest, you know,

482
00:26:38,440 --> 00:26:41,200
Speaker 1: modest increases, which the thing is a positive I think

483
00:26:41,280 --> 00:26:43,400
Speaker 1: I'm you know, two things I'd say about wages. One

484
00:26:43,480 --> 00:26:46,000
Speaker 1: is wage growth. Let's say the US example, we are

485
00:26:46,080 --> 00:26:48,840
Speaker 1: where we should be because at the end of the day,

486
00:26:48,880 --> 00:26:51,960
Speaker 1: wage growth should be roughly the rate of productivity, which

487
00:26:51,960 --> 00:26:54,119
Speaker 1: you and I just spoke about today's just kind of

488
00:26:54,160 --> 00:26:57,840
Speaker 1: kind of low, and inflation which is also called low. Now,

489
00:26:58,080 --> 00:27:01,080
Speaker 1: I would say that I think way growth will continue

490
00:27:01,080 --> 00:27:04,840
Speaker 1: to mostly inch higher, and I think it's a positive.

491
00:27:04,840 --> 00:27:07,560
Speaker 1: And there's always the risk es central banks overreact that

492
00:27:07,640 --> 00:27:11,560
Speaker 1: will not lead to material rising core inflation. The wages

493
00:27:11,600 --> 00:27:13,280
Speaker 1: can go up, I think I'll see a lot in

494
00:27:13,280 --> 00:27:15,720
Speaker 1: the marketplace. Associate if if wages should pick up further,

495
00:27:15,840 --> 00:27:18,040
Speaker 1: take go from three to four percent, all core inflation

496
00:27:18,080 --> 00:27:20,679
Speaker 1: defends behind the curve. That's a that's a mistake in

497
00:27:20,720 --> 00:27:24,480
Speaker 1: our mind because we believe that inflation, not wages inflation

498
00:27:24,520 --> 00:27:27,760
Speaker 1: are anchored and so uh, you know, we believe the

499
00:27:27,800 --> 00:27:30,360
Speaker 1: FED won't make necessary that mistake and overtighten in that.

500
00:27:30,640 --> 00:27:32,639
Speaker 1: So that would be good news, I think, you know,

501
00:27:32,800 --> 00:27:34,360
Speaker 1: but I think we're going to live in this. There's

502
00:27:34,359 --> 00:27:38,040
Speaker 1: several paradoxes in the world. One is low growth before employment.

503
00:27:38,520 --> 00:27:42,480
Speaker 1: Secondly is tight labor markets. Yet low inflation, low growth,

504
00:27:42,520 --> 00:27:47,800
Speaker 1: full employment, tight labor market, low inflation. But I'm hop

505
00:27:47,840 --> 00:27:49,440
Speaker 1: so I think we can get from three to three

506
00:27:49,440 --> 00:27:51,439
Speaker 1: and a half percent wage growth. If we're hoping for

507
00:27:51,600 --> 00:27:55,919
Speaker 1: much higher wage growth, we need to see that productivity boom,

508
00:27:55,960 --> 00:27:59,280
Speaker 1: you know, four or five years out, perhaps accelerate earlier

509
00:27:59,520 --> 00:28:02,879
Speaker 1: for us to more sustained growth. So you're describing a

510
00:28:02,920 --> 00:28:07,400
Speaker 1: little bit of a Goldilocks scenario as much as do well.

511
00:28:08,040 --> 00:28:11,320
Speaker 1: But let's let's let's take that apart, because my pal

512
00:28:11,520 --> 00:28:15,040
Speaker 1: Arry Cudlow would be all over, hey, we have full employment,

513
00:28:15,119 --> 00:28:18,240
Speaker 1: but no inflation. Wage growth is starting to tick up,

514
00:28:18,280 --> 00:28:20,720
Speaker 1: but not so much as to force the fence hands.

515
00:28:21,119 --> 00:28:25,560
Speaker 1: How long can those set of inputs continue into the

516
00:28:26,000 --> 00:28:28,280
Speaker 1: you know, I think unfortunately, I think it may it

517
00:28:28,320 --> 00:28:30,840
Speaker 1: may take a recession before we get some sort of

518
00:28:31,119 --> 00:28:34,640
Speaker 1: you know, the pickup and automation you know, um productivity

519
00:28:34,640 --> 00:28:36,000
Speaker 1: that I think we started to pick up. Because again,

520
00:28:36,040 --> 00:28:39,760
Speaker 1: this is a signal that's five years out, believe or not. Um, Listen,

521
00:28:39,920 --> 00:28:42,160
Speaker 1: I think we're gonna have a period where, you know,

522
00:28:42,200 --> 00:28:45,040
Speaker 1: to this day, you know, our are guarded return out. Look,

523
00:28:45,080 --> 00:28:46,920
Speaker 1: we've had that for two or three years. We have

524
00:28:48,040 --> 00:28:50,800
Speaker 1: we haven't been the only firm. Unfortunately, it may take

525
00:28:50,800 --> 00:28:52,720
Speaker 1: a bear market to get this to get us out

526
00:28:52,720 --> 00:28:55,080
Speaker 1: of this low expected return orbit. And that's no pain, no,

527
00:28:55,880 --> 00:28:59,520
Speaker 1: it's no pain, no game. We were talking about the

528
00:29:00,120 --> 00:29:04,280
Speaker 1: in a positive environment we've been in with full employment

529
00:29:04,400 --> 00:29:09,040
Speaker 1: and low inflation and modest wage growth, Which brings us

530
00:29:09,080 --> 00:29:11,560
Speaker 1: to the question of the Federal Reserve. Given all that,

531
00:29:12,800 --> 00:29:16,720
Speaker 1: do they need to keep tightening or normalizing interest rates

532
00:29:16,800 --> 00:29:18,320
Speaker 1: or are they about where they should be? I think

533
00:29:18,320 --> 00:29:20,040
Speaker 1: there about where they should be. You know, we've had

534
00:29:20,040 --> 00:29:24,719
Speaker 1: a longstanding view, Barry, in part because of how we diagnosed, um,

535
00:29:24,800 --> 00:29:27,240
Speaker 1: where inflation was going to go, that the Federal Reserve

536
00:29:27,840 --> 00:29:31,320
Speaker 1: would be hard pressed to ever get above three percent.

537
00:29:31,600 --> 00:29:33,600
Speaker 1: And we're not like super bars on the economy, and

538
00:29:33,640 --> 00:29:36,520
Speaker 1: we'll just start diagnosed with the other trends, and um,

539
00:29:36,960 --> 00:29:39,360
Speaker 1: we thought four rate hikes and twenty eight team was

540
00:29:39,360 --> 00:29:41,840
Speaker 1: was likely. I think that because of the vigor of

541
00:29:41,840 --> 00:29:45,320
Speaker 1: the labor market, we went into the year expecting to

542
00:29:45,560 --> 00:29:47,720
Speaker 1: rate hikes that would get them just below three percent

543
00:29:47,880 --> 00:29:50,200
Speaker 1: in that range. We've actually backed off that given the

544
00:29:50,240 --> 00:29:55,160
Speaker 1: volatility we've seen and so so we we were expecting

545
00:29:55,200 --> 00:29:57,240
Speaker 1: to when we first published would brings us up to

546
00:29:57,280 --> 00:30:00,200
Speaker 1: where three yeah, where we're close, and we a it

547
00:30:00,360 --> 00:30:03,200
Speaker 1: breaks to two and two and three quarters, right, So

548
00:30:03,240 --> 00:30:05,920
Speaker 1: we're still low by historical standards. But what matters is

549
00:30:05,920 --> 00:30:09,560
Speaker 1: the real rate, not not the nominal um. I think

550
00:30:09,600 --> 00:30:13,400
Speaker 1: they're the bias shifts towards them cutting rates, not because

551
00:30:13,440 --> 00:30:16,120
Speaker 1: they made a mistake per se. But uh, you know,

552
00:30:16,240 --> 00:30:19,160
Speaker 1: I think we're still in a period of choppy performance.

553
00:30:19,240 --> 00:30:21,880
Speaker 1: So it's one sense, you know, the forecast, our forecast

554
00:30:21,920 --> 00:30:24,760
Speaker 1: sounds like soft landing. I've tried to ban that phrase

555
00:30:25,320 --> 00:30:28,080
Speaker 1: advance guard of my colleagues because they said, even if

556
00:30:28,160 --> 00:30:30,680
Speaker 1: even if the ultimate landing is soft, it's it's the

557
00:30:30,680 --> 00:30:32,360
Speaker 1: air bags may drop in the plane, like it's not

558
00:30:32,400 --> 00:30:35,520
Speaker 1: gonna feel like. It's gonna feel choppy. This year, I

559
00:30:35,520 --> 00:30:38,560
Speaker 1: think the economy globally will take a beating. China's growing

560
00:30:38,840 --> 00:30:42,800
Speaker 1: um lower than they report and lower than they expected,

561
00:30:43,360 --> 00:30:45,560
Speaker 1: and we're gonna have some chopping this here in the US.

562
00:30:45,800 --> 00:30:48,320
Speaker 1: So they were a twelve percent, they've fallen into about

563
00:30:48,440 --> 00:30:51,320
Speaker 1: six percent. Are leaning indicators for two years saying real

564
00:30:51,400 --> 00:30:54,400
Speaker 1: feel is closer to five, which, by the way, we

565
00:30:54,520 --> 00:30:56,960
Speaker 1: do not fail with five percent in the United States. Yeah,

566
00:30:57,000 --> 00:30:58,560
Speaker 1: I mean and there were they were they're you know,

567
00:30:58,560 --> 00:31:00,239
Speaker 1: they're doing a tight rope, right, I mean, they are

568
00:31:00,360 --> 00:31:02,120
Speaker 1: what we call this fight and retreat mode. You know,

569
00:31:02,160 --> 00:31:05,120
Speaker 1: when they have softness will stimulate a little bit. But

570
00:31:05,160 --> 00:31:07,600
Speaker 1: the trend is down. Part of that is good news. UM.

571
00:31:07,640 --> 00:31:12,080
Speaker 1: But I think the trade uncertainties UH, you know, really damaged.

572
00:31:12,400 --> 00:31:16,000
Speaker 1: I think consumer confidence in China. Really this slowdown is

573
00:31:16,040 --> 00:31:20,440
Speaker 1: different from past China slowdowns, and that the consumer UH

574
00:31:20,560 --> 00:31:23,160
Speaker 1: is more at the epicenter of the slowdown. Again, we

575
00:31:23,160 --> 00:31:25,640
Speaker 1: are not calling for a hard landing in China, nor

576
00:31:25,720 --> 00:31:28,200
Speaker 1: a recession in the US, but when you have the

577
00:31:28,200 --> 00:31:32,280
Speaker 1: two largest economies, UH set up for some weakness. UM.

578
00:31:32,320 --> 00:31:35,440
Speaker 1: You know that this this nagging concern of recession. I

579
00:31:35,480 --> 00:31:38,880
Speaker 1: don't think we'll dissipate entirely this year. So let's talk

580
00:31:38,920 --> 00:31:43,600
Speaker 1: a little bit about China and trade because it's such

581
00:31:43,640 --> 00:31:47,880
Speaker 1: a fascinating area, especially in light of some of the

582
00:31:47,920 --> 00:31:50,960
Speaker 1: pushback to globalization. I want to I want to pull

583
00:31:51,120 --> 00:31:55,200
Speaker 1: a paragraph, UM out from something you had written previously.

584
00:31:56,000 --> 00:31:59,320
Speaker 1: Fifteenth century China had been open to trade, and it

585
00:31:59,440 --> 00:32:01,920
Speaker 1: was at a time the top economy of the world.

586
00:32:02,320 --> 00:32:05,080
Speaker 1: It's navy was larger than the British Navy would be

587
00:32:05,520 --> 00:32:10,400
Speaker 1: three centuries later. Subsequently, in the Ming Dynasty, they closed

588
00:32:10,400 --> 00:32:13,320
Speaker 1: off the country and there was a five hundred year

589
00:32:13,440 --> 00:32:19,160
Speaker 1: decline in China's innovation. Explain well, I think you know

590
00:32:19,280 --> 00:32:22,560
Speaker 1: China's history, Um, you know, really glorious history. I think

591
00:32:22,560 --> 00:32:27,160
Speaker 1: as a testament UM to the power of globalization, the

592
00:32:27,200 --> 00:32:30,040
Speaker 1: openness to other ideas, as well as the risk that

593
00:32:30,160 --> 00:32:35,320
Speaker 1: society's face should they close their minds uh and their

594
00:32:35,360 --> 00:32:38,680
Speaker 1: walls to to competition and new ideas. I mean, China

595
00:32:38,840 --> 00:32:44,320
Speaker 1: missed the Industrial Revolution because they closed off to the West. Now,

596
00:32:44,360 --> 00:32:46,640
Speaker 1: if you also, I've read a lot of China history

597
00:32:46,680 --> 00:32:50,120
Speaker 1: to educate myself, not having been bored in China, but

598
00:32:50,200 --> 00:32:52,440
Speaker 1: I've visited there. And what you do read at the

599
00:32:52,480 --> 00:32:56,080
Speaker 1: same time is you know the the West, Uh. You

600
00:32:56,120 --> 00:32:59,720
Speaker 1: know is not um does not escape from criticism and

601
00:32:59,760 --> 00:33:03,120
Speaker 1: how which and how we contributed or shaped some China

602
00:33:03,200 --> 00:33:06,520
Speaker 1: policies in the eighteenth and nineteenth century. Right goes back

603
00:33:06,560 --> 00:33:09,440
Speaker 1: to the Opium Wars in the in the British. So UM,

604
00:33:09,840 --> 00:33:11,920
Speaker 1: I think you know you're The more you read China history,

605
00:33:11,960 --> 00:33:14,600
Speaker 1: the more you read two things. One is um you

606
00:33:14,600 --> 00:33:17,280
Speaker 1: know their their their will as well as their belief

607
00:33:18,040 --> 00:33:20,800
Speaker 1: to rise back to where they were at the leading

608
00:33:20,840 --> 00:33:23,600
Speaker 1: economy in the world, the great power UM. You know,

609
00:33:23,640 --> 00:33:27,640
Speaker 1: there's a line from Conspucia Confucius great quote, there shall

610
00:33:27,680 --> 00:33:31,080
Speaker 1: not be two stars in the sky, nor two emperors

611
00:33:31,120 --> 00:33:33,200
Speaker 1: on earth. It's a it can be a little u

612
00:33:33,280 --> 00:33:37,480
Speaker 1: nerving in today's environment between this between the US and China.

613
00:33:37,520 --> 00:33:40,640
Speaker 1: I don't think it has to be as adversarial UM

614
00:33:40,760 --> 00:33:43,520
Speaker 1: as as some fear UM. But I think you know,

615
00:33:43,600 --> 00:33:49,880
Speaker 1: the tensions that we see um, economic, um, technology, military

616
00:33:49,920 --> 00:33:51,840
Speaker 1: wise between the U. S and China, that's just I

617
00:33:51,840 --> 00:33:54,040
Speaker 1: think that's gonna be with us for some time. UM.

618
00:33:54,840 --> 00:33:57,560
Speaker 1: But China UM. China has a roughly a fifteen or

619
00:33:57,560 --> 00:34:00,600
Speaker 1: twenty year window to escape what what one calls the

620
00:34:00,600 --> 00:34:04,560
Speaker 1: middle income trap, right to get wealthier middle average household income.

621
00:34:04,560 --> 00:34:08,320
Speaker 1: They've they've they've astounded the world and their progress to

622
00:34:08,760 --> 00:34:11,440
Speaker 1: mankind has never seen in recorded history of the amount

623
00:34:11,719 --> 00:34:15,200
Speaker 1: and the rapidity of economic development. UM. But they're not

624
00:34:15,400 --> 00:34:16,799
Speaker 1: out of the woods. I mean, I think it's been

625
00:34:16,920 --> 00:34:20,799
Speaker 1: risky to discount China UM. But you know, they have

626
00:34:20,840 --> 00:34:23,839
Speaker 1: some challenges to work through. The demographic challenge that they

627
00:34:23,880 --> 00:34:26,120
Speaker 1: face over the next thirty or forty years is the

628
00:34:26,120 --> 00:34:29,120
Speaker 1: biggest one. Well, that single child policy is turned out,

629
00:34:29,400 --> 00:34:33,439
Speaker 1: their population is gonna drop. Just think about that. Over

630
00:34:33,480 --> 00:34:36,719
Speaker 1: the center. Those are the unintended consequences of that sort

631
00:34:36,760 --> 00:34:42,200
Speaker 1: of social engineering Number one. But still, given how rapidly

632
00:34:43,000 --> 00:34:48,560
Speaker 1: their quasi centrally planned economy has grown, is there any

633
00:34:48,600 --> 00:34:52,520
Speaker 1: reason to think they can't become the dominant economic power

634
00:34:52,960 --> 00:34:57,200
Speaker 1: they happen to be. Yes, I mean, and that what

635
00:34:57,320 --> 00:34:59,000
Speaker 1: I think. Here's the thing. I love how you just

636
00:34:59,040 --> 00:35:01,120
Speaker 1: mentioned that, Barry, because you've you've hit on this for

637
00:35:01,120 --> 00:35:04,080
Speaker 1: a long time. Um, And so I'm gonna say this

638
00:35:04,120 --> 00:35:08,600
Speaker 1: as an economist, UM, I think economic growth is often

639
00:35:08,640 --> 00:35:12,000
Speaker 1: for investors is focused on too much. So I could

640
00:35:12,000 --> 00:35:13,600
Speaker 1: show you a chart, and we were showing this for

641
00:35:13,640 --> 00:35:15,520
Speaker 1: a decade actually in the depths of two thousand and nine,

642
00:35:15,560 --> 00:35:18,040
Speaker 1: two thousand and ten. I show you a nice handy

643
00:35:18,080 --> 00:35:21,759
Speaker 1: dandy chart that shows this the relationship between long run

644
00:35:21,800 --> 00:35:24,520
Speaker 1: economic growth of a country and its stock returns hard

645
00:35:25,400 --> 00:35:27,719
Speaker 1: There's a zero correlation. It looks like a shotgun on

646
00:35:27,719 --> 00:35:30,080
Speaker 1: a page, which as an economist you kind of not

647
00:35:30,160 --> 00:35:31,840
Speaker 1: like you kind of talking yourself out of a job.

648
00:35:32,080 --> 00:35:34,759
Speaker 1: And I think that's important because it's like rather more

649
00:35:34,800 --> 00:35:38,359
Speaker 1: than expected growth. It's the price paid for growth. It's evaluations.

650
00:35:38,440 --> 00:35:42,360
Speaker 1: That's why, Yeah, I would say market the UK, China matters.

651
00:35:42,400 --> 00:35:45,719
Speaker 1: That's why, you know, even as the economic performance has

652
00:35:45,760 --> 00:35:49,640
Speaker 1: been languaged at times in the US, we were very

653
00:35:49,640 --> 00:35:52,919
Speaker 1: optimistic on US investment returns. You can see our first

654
00:35:52,920 --> 00:35:56,319
Speaker 1: outlook in two thousand and ten. Some just we thought

655
00:35:56,400 --> 00:35:59,240
Speaker 1: we we thought we'd be above average historical returns. If anything,

656
00:35:59,239 --> 00:36:01,800
Speaker 1: we were too low in our distribution. We got above

657
00:36:01,840 --> 00:36:04,960
Speaker 1: the mean. UM. Now, as the economy has caught in

658
00:36:05,000 --> 00:36:07,960
Speaker 1: closer to full employment every year, we've gotten more conservative

659
00:36:07,960 --> 00:36:10,560
Speaker 1: and guarded and our investment returns it's because of the

660
00:36:10,600 --> 00:36:12,919
Speaker 1: valuation you point to, so so good rule of thumb,

661
00:36:13,000 --> 00:36:15,000
Speaker 1: markets get got in half. Not the worst time in

662
00:36:15,000 --> 00:36:17,640
Speaker 1: the world to buy equities, it's it's not so. Let's

663
00:36:17,680 --> 00:36:22,080
Speaker 1: circle back to the financial crisis that you mentioned. Are

664
00:36:22,160 --> 00:36:26,439
Speaker 1: we still feeling the effects of that crisis today, more

665
00:36:26,440 --> 00:36:29,040
Speaker 1: than ten years later. I think we are globally. I mean,

666
00:36:29,080 --> 00:36:33,759
Speaker 1: the that sort of tight grip has continues to recede. UM.

667
00:36:34,400 --> 00:36:37,600
Speaker 1: I think you see it even from some investors, UM

668
00:36:37,600 --> 00:36:40,920
Speaker 1: waiting for the next shooter drop. You know, the risk

669
00:36:40,960 --> 00:36:43,400
Speaker 1: aversion savings. I mean, you know, some of the US

670
00:36:43,640 --> 00:36:47,400
Speaker 1: probably needed. I think we got a little bit better balanced. Um.

671
00:36:47,800 --> 00:36:50,520
Speaker 1: We've clearly seen it in in in the regulatory front

672
00:36:50,520 --> 00:36:53,759
Speaker 1: across the various markets over the past several years. UM.

673
00:36:53,800 --> 00:36:55,880
Speaker 1: You know, with every passing day, though, it kind of

674
00:36:55,920 --> 00:36:58,960
Speaker 1: recedes in the rear view mirror. UM. So we're we're

675
00:36:59,000 --> 00:37:01,000
Speaker 1: not fully out the woods, but we have come a

676
00:37:01,000 --> 00:37:05,279
Speaker 1: long way. So the the low growth that we've been

677
00:37:05,320 --> 00:37:10,440
Speaker 1: talking about, the low productivity soft GDP UM again, is

678
00:37:10,480 --> 00:37:13,799
Speaker 1: that hangover effect of the crisis or is there something else? Well,

679
00:37:13,800 --> 00:37:15,840
Speaker 1: it was it was part I mean we over consumed,

680
00:37:15,880 --> 00:37:19,080
Speaker 1: as you know many of your past guests have have illuminated.

681
00:37:19,120 --> 00:37:21,080
Speaker 1: But again it's that's where we focused on the trend.

682
00:37:21,080 --> 00:37:23,160
Speaker 1: The trend was starting the bend two thousand, two thou

683
00:37:23,360 --> 00:37:25,960
Speaker 1: and two, which why we come back to productivity. And

684
00:37:26,000 --> 00:37:28,840
Speaker 1: again I don't I would hope that, Um, you know

685
00:37:28,880 --> 00:37:32,520
Speaker 1: that your listeners. I don't. I do not wish or

686
00:37:32,840 --> 00:37:35,279
Speaker 1: intend to be portrayed as a techno optimist. I mean,

687
00:37:35,320 --> 00:37:39,600
Speaker 1: I think there are reasons to be optimistic, but you know,

688
00:37:39,680 --> 00:37:42,839
Speaker 1: productivity will pick up that I that I have high

689
00:37:42,920 --> 00:37:46,000
Speaker 1: conviction in UM over the next several years, and it's

690
00:37:46,040 --> 00:37:48,800
Speaker 1: an environment of potentially higher growth that no one's is

691
00:37:49,160 --> 00:37:51,239
Speaker 1: anticipating the same way in the mid nineties, no one

692
00:37:51,360 --> 00:37:53,719
Speaker 1: was anticipating in the late nineties. But that does not

693
00:37:53,760 --> 00:37:56,279
Speaker 1: mean there's not gonna be headwinds and challenges that the

694
00:37:56,480 --> 00:37:59,839
Speaker 1: the need for job training, as an example on automation

695
00:38:00,040 --> 00:38:03,280
Speaker 1: for a right in the pickup an automation is significant

696
00:38:03,320 --> 00:38:06,000
Speaker 1: even if we do not have widespread job losses. I mean,

697
00:38:06,000 --> 00:38:07,839
Speaker 1: there could be a very well ten years from now

698
00:38:08,080 --> 00:38:12,880
Speaker 1: companies on average maybe spending more for job retraining than

699
00:38:12,920 --> 00:38:15,480
Speaker 1: they will be on I T So that you know,

700
00:38:15,520 --> 00:38:17,239
Speaker 1: that's the sort of thing I just you know, and

701
00:38:17,280 --> 00:38:21,080
Speaker 1: that's not again it's there's cautious optimism in my in

702
00:38:21,160 --> 00:38:24,359
Speaker 1: my in my council to my daughter, but it's not pollyannish.

703
00:38:24,440 --> 00:38:28,040
Speaker 1: I mean, there's challenges we all face and uh, the

704
00:38:28,080 --> 00:38:31,040
Speaker 1: technology can cut both ways. So so let's stay with

705
00:38:31,120 --> 00:38:34,480
Speaker 1: the concept of the advantages of the exchange of ideas

706
00:38:34,480 --> 00:38:38,680
Speaker 1: in global trade. How do you square that with what

707
00:38:38,760 --> 00:38:42,600
Speaker 1: we've seen in terms of the rise of popularism, the

708
00:38:42,680 --> 00:38:46,000
Speaker 1: United States pulling out from TPP and the powers according

709
00:38:46,080 --> 00:38:50,520
Speaker 1: a number of other UM policies and trade packs and

710
00:38:50,600 --> 00:38:55,200
Speaker 1: even um the UK and Brexit, are we moving away

711
00:38:55,200 --> 00:38:58,480
Speaker 1: from globalization with it's it's certainly stalled. And if you

712
00:38:58,560 --> 00:39:02,160
Speaker 1: define globalization tradition only which is fair by trade, I

713
00:39:02,200 --> 00:39:05,120
Speaker 1: mean our our ideal multiplier rises above that and say,

714
00:39:05,160 --> 00:39:08,960
Speaker 1: although trade does matter, it's the trade of ideas of knowledge,

715
00:39:08,960 --> 00:39:11,919
Speaker 1: the exposure if I'm exposed to your idea, Barry, even

716
00:39:11,920 --> 00:39:13,680
Speaker 1: if you live halfway away in the world, and that

717
00:39:13,800 --> 00:39:16,160
Speaker 1: leads me to a new idea that has what has

718
00:39:16,239 --> 00:39:21,320
Speaker 1: changed history Now, trade sometimes encapsulates an idea, a trade

719
00:39:21,360 --> 00:39:23,520
Speaker 1: for a new machine or product, and so you can

720
00:39:23,520 --> 00:39:26,680
Speaker 1: infer knowledge. But I think we have stalled in the

721
00:39:26,520 --> 00:39:30,040
Speaker 1: in the globalization of trade of goods across borders. The

722
00:39:30,080 --> 00:39:33,440
Speaker 1: biggest reason for the rise in populism and related to

723
00:39:33,480 --> 00:39:36,200
Speaker 1: that is the rise of income inequality, and I think

724
00:39:36,200 --> 00:39:39,000
Speaker 1: a lot of academic research would show um that more

725
00:39:39,040 --> 00:39:43,440
Speaker 1: of it has been driven by technology than by potentially

726
00:39:43,520 --> 00:39:47,400
Speaker 1: unfair trade practices. UM. So what that means is if

727
00:39:47,440 --> 00:39:50,840
Speaker 1: the pace of technol technological change is not slowing, that

728
00:39:50,920 --> 00:39:53,480
Speaker 1: means unfortunately the radar that that the level of income

729
00:39:53,520 --> 00:39:56,359
Speaker 1: inequality may remain high. And so these UM, what some

730
00:39:56,440 --> 00:40:01,840
Speaker 1: call populistic populism, tensions in the world may remain elevated.

731
00:40:02,239 --> 00:40:04,120
Speaker 1: Uh that that had told us two years ago that

732
00:40:04,520 --> 00:40:07,520
Speaker 1: like any at any election where in a country where

733
00:40:07,520 --> 00:40:10,600
Speaker 1: income inequality has risen significantly, I would say the election

734
00:40:10,680 --> 00:40:13,000
Speaker 1: is going to be closer than anticipated. Shock can be

735
00:40:13,040 --> 00:40:15,600
Speaker 1: shocked at the outcome. I'm not a political handicapper, but

736
00:40:15,640 --> 00:40:19,920
Speaker 1: it says that we should expect surprises, UM, because I

737
00:40:19,960 --> 00:40:22,680
Speaker 1: think there is UM. Again back to this, happiness can

738
00:40:22,760 --> 00:40:26,400
Speaker 1: be relative. The rise of income inequality UM in a

739
00:40:26,440 --> 00:40:30,000
Speaker 1: low growth environment UM, you know, has led to you know,

740
00:40:30,080 --> 00:40:36,200
Speaker 1: some painful losses of some jobs opportunities, including the United States,

741
00:40:36,360 --> 00:40:38,520
Speaker 1: And so I think that's something that not to lose

742
00:40:38,560 --> 00:40:42,440
Speaker 1: sight of. So rising income in equality gives gives rise

743
00:40:42,560 --> 00:40:46,280
Speaker 1: to increase in populism, it can, it can, which gives

744
00:40:46,360 --> 00:40:51,040
Speaker 1: rise to closer elections. And does that mean political parties

745
00:40:51,200 --> 00:40:53,880
Speaker 1: carry less sway and people vote that. I don't know,

746
00:40:54,120 --> 00:40:56,400
Speaker 1: you know, I wish, as I'm trying to be careful

747
00:40:56,400 --> 00:40:59,360
Speaker 1: here with my statements, I wish though the political environment

748
00:40:59,440 --> 00:41:04,080
Speaker 1: wasn't so um polarized. UM, you know, I I uh,

749
00:41:04,120 --> 00:41:06,800
Speaker 1: you know, it's you know, it's I think it's natural,

750
00:41:06,800 --> 00:41:10,799
Speaker 1: and it's actually a healthy environment when we're debating. But

751
00:41:10,840 --> 00:41:13,200
Speaker 1: if we're debating and listening, you know where I hope

752
00:41:13,200 --> 00:41:16,480
Speaker 1: where you worry about is when in any in any society,

753
00:41:16,640 --> 00:41:19,520
Speaker 1: forget politics for the side, any society, that we're not

754
00:41:19,600 --> 00:41:22,440
Speaker 1: listening to each other and so we're talking beyond each other.

755
00:41:22,520 --> 00:41:25,920
Speaker 1: And today we see the backlash effect. When you present

756
00:41:26,040 --> 00:41:29,719
Speaker 1: facts to people, it just hardens their position if they

757
00:41:29,760 --> 00:41:32,280
Speaker 1: don't want to accept those facts. We have been speaking

758
00:41:32,280 --> 00:41:35,160
Speaker 1: with Joe Davis a Vanguard where he is Chief Economists

759
00:41:35,160 --> 00:41:38,600
Speaker 1: and wears a number of other hats. If you enjoy

760
00:41:38,680 --> 00:41:41,279
Speaker 1: this conversation, we'll be sure and come back for the

761
00:41:41,320 --> 00:41:43,960
Speaker 1: podcast extras. Will we keep the tape rolling and continue

762
00:41:44,000 --> 00:41:49,719
Speaker 1: discussing technology, productivity, global trade and idea multipliers and what

763
00:41:49,840 --> 00:41:53,240
Speaker 1: they mean for the future. We love your comments, feedback

764
00:41:53,239 --> 00:41:57,000
Speaker 1: and suggestions right to us at m IB podcast at

765
00:41:57,000 --> 00:41:59,880
Speaker 1: Bloomberg dot net. You can follow me on Twitter at

766
00:42:00,040 --> 00:42:03,560
Speaker 1: Rid Halts or check out my daily column at Bloomberg

767
00:42:03,600 --> 00:42:07,799
Speaker 1: dot com slash Opinion. I'm Barrier Halts. You're listening to

768
00:42:07,880 --> 00:42:24,399
Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast, Joe,

769
00:42:24,440 --> 00:42:26,440
Speaker 1: Thank you so much for doing this I've been looking

770
00:42:26,480 --> 00:42:30,400
Speaker 1: forward to having this conversation. UM. You spoke at a

771
00:42:30,480 --> 00:42:33,399
Speaker 1: conference we hosted I want to say about a year

772
00:42:33,400 --> 00:42:37,160
Speaker 1: ago in southern California, and you touched on some of

773
00:42:37,200 --> 00:42:41,600
Speaker 1: the ideas from UM, the idea multiplier and the long

774
00:42:41,680 --> 00:42:44,840
Speaker 1: term trend of of global exchange of ideas. So I

775
00:42:44,920 --> 00:42:47,680
Speaker 1: knew this was going to be a very interesting conversation.

776
00:42:48,280 --> 00:42:51,719
Speaker 1: Some of the questions I didn't get to were the

777
00:42:51,880 --> 00:42:56,200
Speaker 1: traditional boring economic questions, so I'm gonna skip most of

778
00:42:56,239 --> 00:42:59,800
Speaker 1: those and and just ask you a couple of short

779
00:43:00,040 --> 00:43:03,880
Speaker 1: economic questions that I'm kind of keep. Well, you go

780
00:43:03,960 --> 00:43:06,080
Speaker 1: on as you could. You can answer them in as

781
00:43:06,160 --> 00:43:09,080
Speaker 1: much depth as you like. But there I'm not asking

782
00:43:09,120 --> 00:43:11,919
Speaker 1: you what do you think of GDP? I want to say, Well,

783
00:43:12,000 --> 00:43:14,680
Speaker 1: let me ask this question. What do you think are

784
00:43:14,719 --> 00:43:18,919
Speaker 1: the most important economic indicators? I know people over emphasize

785
00:43:18,960 --> 00:43:22,960
Speaker 1: some and under under emphasized others. What do you think

786
00:43:23,000 --> 00:43:25,000
Speaker 1: are the three most important things that we should be

787
00:43:25,000 --> 00:43:28,160
Speaker 1: looking I'll give you Barry, we we I genuinely believe this,

788
00:43:28,239 --> 00:43:29,879
Speaker 1: and we do this. We look at all of them,

789
00:43:30,280 --> 00:43:32,520
Speaker 1: right so we we for a long time, since I've

790
00:43:32,520 --> 00:43:35,160
Speaker 1: been a vanguard, we use big data techniques to say,

791
00:43:35,440 --> 00:43:40,239
Speaker 1: list every signal, every economic statistic, job was claimed, non

792
00:43:40,280 --> 00:43:45,040
Speaker 1: farm payroll, manufacturing is um. They all have some signal

793
00:43:45,080 --> 00:43:47,359
Speaker 1: in it and noise. Think of any stock. I don't

794
00:43:47,360 --> 00:43:49,680
Speaker 1: think you may necessarily look at one stock to say

795
00:43:49,680 --> 00:43:52,680
Speaker 1: how's the broad market doing. So we will we look

796
00:43:52,719 --> 00:43:54,600
Speaker 1: at all of them and see what is the an

797
00:43:54,600 --> 00:43:58,360
Speaker 1: extract from that, what is the momentum and the common

798
00:43:58,440 --> 00:44:03,120
Speaker 1: signal across the economy. Because every indicator goes through fits

799
00:44:03,120 --> 00:44:05,239
Speaker 1: and starts of saying being very valuable and then not

800
00:44:05,360 --> 00:44:08,560
Speaker 1: being valuable. So I'd say that that's the answer to

801
00:44:08,560 --> 00:44:10,399
Speaker 1: your questions. We look at all of them and an

802
00:44:10,400 --> 00:44:12,719
Speaker 1: extract from that what are the common two or three

803
00:44:12,760 --> 00:44:15,400
Speaker 1: signals that you could say this is the trend and

804
00:44:15,719 --> 00:44:20,280
Speaker 1: the momentum in the economy, rather than pick any one signal.

805
00:44:20,920 --> 00:44:24,160
Speaker 1: So so the flip side of that question is what

806
00:44:24,239 --> 00:44:29,000
Speaker 1: do you think is the most over hyped economic indicator? Well,

807
00:44:29,040 --> 00:44:33,000
Speaker 1: I think gdphasis, I think we do. I mean, I

808
00:44:33,000 --> 00:44:34,959
Speaker 1: think there's a lot of accounting regulators. I mean there's

809
00:44:35,040 --> 00:44:37,680
Speaker 1: you know, GDP. GDP can can accelerate for a time

810
00:44:37,719 --> 00:44:40,960
Speaker 1: just because businesses are are have slowed their growth and

811
00:44:41,040 --> 00:44:44,279
Speaker 1: inventories are building, right, there's a little bit of being

812
00:44:44,280 --> 00:44:46,680
Speaker 1: counting to it. Again, it's valuable to have came out

813
00:44:46,680 --> 00:44:52,160
Speaker 1: of even war planning, you know, decades ago. Yeah, yeah, yeah,

814
00:44:52,280 --> 00:44:55,440
Speaker 1: the decades is going to actually government officials did not

815
00:44:55,560 --> 00:44:59,560
Speaker 1: know what the economy was producing and so to track that.

816
00:45:00,040 --> 00:45:02,719
Speaker 1: Um so a great, great development, but has its limitations.

817
00:45:02,760 --> 00:45:04,120
Speaker 1: I mean, if I was going to focus on on

818
00:45:04,120 --> 00:45:06,120
Speaker 1: one at the end of the day, it's it's job growth.

819
00:45:06,680 --> 00:45:08,520
Speaker 1: If you and I running a business to add a

820
00:45:08,520 --> 00:45:11,480
Speaker 1: new worker, to let worker go, that that's uh, that's

821
00:45:11,480 --> 00:45:17,120
Speaker 1: a significant investment of corporate American costs, uh cost structure.

822
00:45:17,200 --> 00:45:19,840
Speaker 1: So job growth is probably the most meaningful. What about

823
00:45:19,920 --> 00:45:22,279
Speaker 1: yield curve? We heard a whole lot of yelling and

824
00:45:22,320 --> 00:45:25,880
Speaker 1: screaming when the two and the five year briefly inverted,

825
00:45:26,200 --> 00:45:28,840
Speaker 1: not the traditional two and ten year How do you

826
00:45:28,840 --> 00:45:30,719
Speaker 1: look at the yeld curve? But and again you know,

827
00:45:30,760 --> 00:45:33,160
Speaker 1: a van grd and just we got statistics on our

828
00:45:33,160 --> 00:45:35,719
Speaker 1: back at our back saying of listen, I believe there's

829
00:45:35,719 --> 00:45:38,560
Speaker 1: a portfolio of indicators you should look at whether you're

830
00:45:38,560 --> 00:45:43,400
Speaker 1: trying to divide the future returns of the stock market, probability, recession,

831
00:45:43,680 --> 00:45:46,520
Speaker 1: odds of a bear market. Um. But that said, if

832
00:45:46,560 --> 00:45:49,320
Speaker 1: I was going to pick one indicator to to say

833
00:45:49,400 --> 00:45:51,479
Speaker 1: are we going into recession on it is the Yeld curve,

834
00:45:51,800 --> 00:45:53,960
Speaker 1: and it's the traditional what I would call the academic

835
00:45:54,000 --> 00:45:57,680
Speaker 1: one to ten, no tens and and and three months

836
00:45:57,680 --> 00:46:00,799
Speaker 1: tens months cash. That's the that's the os accurate, it's

837
00:46:00,840 --> 00:46:03,319
Speaker 1: the most genuine I know. Some said, hey, the zero

838
00:46:03,360 --> 00:46:06,080
Speaker 1: interest rate environment, low industrate environment is distorted. I don't

839
00:46:06,080 --> 00:46:07,680
Speaker 1: buy it. If we're you and are if we're going

840
00:46:07,719 --> 00:46:10,640
Speaker 1: into a deep downturn, I imagine the tenure treasury could

841
00:46:10,640 --> 00:46:13,160
Speaker 1: be a one percent and the curve is easily inverting.

842
00:46:13,200 --> 00:46:15,560
Speaker 1: So I think that's the bond market has. It gives

843
00:46:15,560 --> 00:46:18,240
Speaker 1: you more heads up on a downturn than the stock

844
00:46:18,280 --> 00:46:21,480
Speaker 1: market does. Now, what we've seen when at least with

845
00:46:21,520 --> 00:46:24,080
Speaker 1: the two and the ten is it can give you

846
00:46:24,200 --> 00:46:27,040
Speaker 1: a lead time of about a year if your memory

847
00:46:27,080 --> 00:46:30,920
Speaker 1: serves the three months and the ten year similar semi,

848
00:46:30,960 --> 00:46:32,880
Speaker 1: it's actually a little bit farther out right because the

849
00:46:32,920 --> 00:46:36,720
Speaker 1: markets forward looking and at least past four or fifty years.

850
00:46:36,719 --> 00:46:38,680
Speaker 1: Not not to blame the FED, but the FED has

851
00:46:38,719 --> 00:46:43,080
Speaker 1: generally been an overly restrictive territory to tamp down inflation. Right,

852
00:46:43,120 --> 00:46:47,319
Speaker 1: So the two's have been elevated above the tens. I've

853
00:46:47,360 --> 00:46:50,520
Speaker 1: exteen me above cash, you know a year out, you know,

854
00:46:50,520 --> 00:46:53,879
Speaker 1: anticipating further FED tightening. At that point, perhaps the market

855
00:46:53,960 --> 00:46:57,040
Speaker 1: is pricing in a quote unquote FED mistake or overly restrictive.

856
00:46:57,560 --> 00:46:59,640
Speaker 1: That's the power of the yeld curve. It's not in

857
00:46:59,680 --> 00:47:02,480
Speaker 1: foul bawl um. But if you were going to pick

858
00:47:02,520 --> 00:47:05,160
Speaker 1: one indicator, and I wouldn't because you're reducing your odds

859
00:47:05,160 --> 00:47:07,480
Speaker 1: of success. But if you did, that would be the

860
00:47:07,480 --> 00:47:09,839
Speaker 1: one that hang your hat on. So we mentioned the

861
00:47:09,840 --> 00:47:13,880
Speaker 1: hangover effect that we're still feeling from the Great Financial Crisis.

862
00:47:14,120 --> 00:47:17,000
Speaker 1: Let me bring this back to rates in the yield curve.

863
00:47:18,000 --> 00:47:21,759
Speaker 1: Back in the late seventies, when inflation had spiked dramatically

864
00:47:21,760 --> 00:47:25,279
Speaker 1: the oil UH the Arab boil embargo UH, plus the

865
00:47:25,320 --> 00:47:30,600
Speaker 1: malaise of Vietnam and watergate. Then FED Chief Paul Volker

866
00:47:30,920 --> 00:47:35,080
Speaker 1: spiked rates to pick a number fift. It broke the

867
00:47:35,120 --> 00:47:38,520
Speaker 1: back of inflation, and then we were looking at a

868
00:47:38,680 --> 00:47:42,799
Speaker 1: thirty plus year bullmarket and bonds as rates gradually fell

869
00:47:42,880 --> 00:47:46,240
Speaker 1: from there. How do you since you look at trends

870
00:47:46,320 --> 00:47:50,480
Speaker 1: and momentum. How do you contextualize those two. It appears

871
00:47:50,600 --> 00:47:53,520
Speaker 1: that the that trend line has been broken and the

872
00:47:53,520 --> 00:47:55,759
Speaker 1: momentum is now moving in a different direction. What does

873
00:47:55,760 --> 00:47:58,839
Speaker 1: that tell us about bonds and the state of the world. Well,

874
00:47:58,880 --> 00:48:01,160
Speaker 1: I think you know that actually the pattern of of

875
00:48:01,280 --> 00:48:06,040
Speaker 1: bond yields. So I know, again, including Vanguard's founder Jack Bogel,

876
00:48:06,200 --> 00:48:10,719
Speaker 1: rest in peace, long believer in mean reversion. Why I'm

877
00:48:10,760 --> 00:48:13,240
Speaker 1: bringing this up is I think mean reversion is clearly

878
00:48:13,239 --> 00:48:17,040
Speaker 1: the most powerful force in finance. It's also the most dangerous.

879
00:48:17,719 --> 00:48:20,160
Speaker 1: And I use interest rates an example, because even a Vanguard,

880
00:48:20,200 --> 00:48:22,840
Speaker 1: we've had some clients you know, understandably concerned of a

881
00:48:22,920 --> 00:48:26,120
Speaker 1: rapid rise in in in interest rates in bon yields

882
00:48:26,160 --> 00:48:28,480
Speaker 1: because they lived through the seven from a very low,

883
00:48:28,760 --> 00:48:30,799
Speaker 1: very low yes, but you know, concerns of a bond

884
00:48:30,800 --> 00:48:34,440
Speaker 1: bear market. And uh, you know our analysis said that,

885
00:48:34,480 --> 00:48:38,640
Speaker 1: although possible, extremely unlikely. And that's what Just because interest

886
00:48:38,760 --> 00:48:41,320
Speaker 1: rates are low today doesn't mean they have to revert

887
00:48:41,400 --> 00:48:44,759
Speaker 1: to some to some average. My question is what's the

888
00:48:44,880 --> 00:48:47,600
Speaker 1: danger and mean reversion is what mean are we reverting to?

889
00:48:48,200 --> 00:48:50,880
Speaker 1: This is the same mistake. I we believe some investors

890
00:48:51,000 --> 00:48:53,400
Speaker 1: have made over the past several years with the CAPE,

891
00:48:53,400 --> 00:48:56,920
Speaker 1: the Schiller cape ratio. Nothing wrong with the sicklely Justepe

892
00:48:57,040 --> 00:48:59,759
Speaker 1: ratio or the level of interest rates. But what is

893
00:49:00,000 --> 00:49:03,640
Speaker 1: normal that's conditional on what are the forces that drive

894
00:49:03,800 --> 00:49:06,640
Speaker 1: those factors. So an interest rates, for example, I believe

895
00:49:06,680 --> 00:49:09,000
Speaker 1: that a fair value we are fair value for long

896
00:49:09,080 --> 00:49:11,640
Speaker 1: term interustrates hasn't changed in you if it's roughly three percent,

897
00:49:12,480 --> 00:49:15,760
Speaker 1: so even though that's below where the seventies and eighties

898
00:49:15,800 --> 00:49:18,759
Speaker 1: average was, inflation was higher. Then So I would tell

899
00:49:18,800 --> 00:49:21,759
Speaker 1: investors if you if you worry about or believe that

900
00:49:21,840 --> 00:49:24,359
Speaker 1: interest rates are going to rise maturally long term interest rates,

901
00:49:24,400 --> 00:49:26,920
Speaker 1: mortgage rates tend your treasurreates, you have to believe that

902
00:49:27,000 --> 00:49:30,800
Speaker 1: inflation is fundamentally going to accelerate on a trend basis.

903
00:49:31,600 --> 00:49:33,960
Speaker 1: So let's let's talk about the CAPE. You brought it up,

904
00:49:34,200 --> 00:49:37,839
Speaker 1: going back to the early nineteen nineties. The CAPE has

905
00:49:37,920 --> 00:49:41,840
Speaker 1: spent I think it's something like at the time above

906
00:49:42,040 --> 00:49:45,920
Speaker 1: its average trend. Is there no mean regression there? Or

907
00:49:46,400 --> 00:49:50,760
Speaker 1: are we using and thinking about CAPE incorrectly? It doesn't

908
00:49:50,800 --> 00:49:54,279
Speaker 1: seem yea, so the valuation great reach. I mean the

909
00:49:54,320 --> 00:49:56,920
Speaker 1: CAPE going back to Bob Shiller, Yale and others. You

910
00:49:56,960 --> 00:50:01,240
Speaker 1: know that that that that measure is formative for the

911
00:50:01,280 --> 00:50:04,480
Speaker 1: whether the more stock market is fairly valued. Our issue

912
00:50:04,600 --> 00:50:07,040
Speaker 1: is with investors comparing that to the long run average.

913
00:50:07,080 --> 00:50:09,160
Speaker 1: So they just draw a line across their piece of paper.

914
00:50:09,480 --> 00:50:11,439
Speaker 1: The cap has been sometimes below into your point barrier,

915
00:50:11,480 --> 00:50:14,800
Speaker 1: it's been generally above ever the past twenty years. Well,

916
00:50:14,960 --> 00:50:17,480
Speaker 1: what's actually important is is that you actually have to

917
00:50:17,520 --> 00:50:20,120
Speaker 1: control for what the what is the fair value that

918
00:50:20,160 --> 00:50:22,960
Speaker 1: the market should the gravitational pull is should go to.

919
00:50:23,000 --> 00:50:25,600
Speaker 1: We shouldn't always go to the same average. And so

920
00:50:25,680 --> 00:50:30,080
Speaker 1: our analysis and we had a academic research published last year.

921
00:50:30,640 --> 00:50:33,560
Speaker 1: They show that you can actually significantly improve your your

922
00:50:33,600 --> 00:50:37,920
Speaker 1: your likelihood of projecting five and tenure out returns significantly

923
00:50:38,440 --> 00:50:40,480
Speaker 1: if you control for the level of interest rates real

924
00:50:40,560 --> 00:50:42,880
Speaker 1: interest rates in the economy. In other words, when you

925
00:50:42,920 --> 00:50:47,120
Speaker 1: have really low interest rates and you should have higher peed,

926
00:50:47,200 --> 00:50:49,160
Speaker 1: all else equal, it's called the fair value, just like

927
00:50:49,200 --> 00:50:52,200
Speaker 1: sometimes full employments at four sometimes it's at five percent.

928
00:50:52,560 --> 00:50:55,040
Speaker 1: Sometimes fair value for the U S dollars higher lowan. Now,

929
00:50:55,080 --> 00:50:59,520
Speaker 1: again I do not know exactly what the fair value is,

930
00:50:59,560 --> 00:51:01,880
Speaker 1: but I can tell you that the range that the

931
00:51:01,920 --> 00:51:05,080
Speaker 1: stock market should gravitate towards either up towards it or

932
00:51:05,200 --> 00:51:08,279
Speaker 1: down towards it. That fair value can change through time

933
00:51:08,280 --> 00:51:11,640
Speaker 1: with economic conditions and trend conditions, warn't it, And that

934
00:51:11,800 --> 00:51:14,399
Speaker 1: which is why only in the past year, how we

935
00:51:14,640 --> 00:51:17,680
Speaker 1: did we become more guarded on the stock market. So

936
00:51:17,800 --> 00:51:21,839
Speaker 1: despite low growth environment and low interest rates, our indicators

937
00:51:21,840 --> 00:51:24,080
Speaker 1: were saying that the the U S stock market was

938
00:51:24,360 --> 00:51:27,719
Speaker 1: clearly undervalued in two thousand and ten, despite some saying

939
00:51:27,719 --> 00:51:29,960
Speaker 1: it's a new normal and all that. On the investment side,

940
00:51:29,960 --> 00:51:33,400
Speaker 1: we were saying a very high expected return premium for

941
00:51:33,520 --> 00:51:37,440
Speaker 1: U S stocks that remained pretty constructive up until more recently.

942
00:51:37,840 --> 00:51:40,320
Speaker 1: And only recently did the US stock market in the

943
00:51:40,400 --> 00:51:44,840
Speaker 1: CAPE ratio break above that fair value range. And again

944
00:51:45,040 --> 00:51:48,520
Speaker 1: we have no predictability on next year's return, but it

945
00:51:48,560 --> 00:51:51,600
Speaker 1: does have some predictability and where the stock market the

946
00:51:51,640 --> 00:51:53,719
Speaker 1: average return will be over the next five or ten ures.

947
00:51:53,760 --> 00:51:55,960
Speaker 1: So is there mean reversion, yes, but I think we

948
00:51:56,040 --> 00:51:58,239
Speaker 1: just have to be careful what means we are reverting to,

949
00:51:58,600 --> 00:52:04,320
Speaker 1: whether it's interest rates were valuations. So therefore, with elevated

950
00:52:04,680 --> 00:52:08,600
Speaker 1: um valuations in the US, I'm gonna assume you're expected

951
00:52:08,640 --> 00:52:13,040
Speaker 1: returns for the next decade is going to be below average. Yeah, oh, certainly,

952
00:52:13,080 --> 00:52:16,360
Speaker 1: and we've we've had that for for over three years. Um.

953
00:52:16,400 --> 00:52:18,360
Speaker 1: You know, actually this year is the first time that

954
00:52:18,520 --> 00:52:21,319
Speaker 1: we did not maturely downgrade or expect a ten your

955
00:52:21,520 --> 00:52:24,960
Speaker 1: your turnout look for a balanced portfolio. Further, right, So

956
00:52:25,000 --> 00:52:27,560
Speaker 1: we've been getting more guarded every year as the markets

957
00:52:27,560 --> 00:52:30,840
Speaker 1: have actually rewarded us on average. So a little bit

958
00:52:30,920 --> 00:52:33,840
Speaker 1: more constructive outside the US over the next five or

959
00:52:33,840 --> 00:52:38,080
Speaker 1: ten years. Um, uh, the US. So I think smart investors,

960
00:52:38,200 --> 00:52:41,279
Speaker 1: you know, even even a simple contrarian strategy of rebalancing

961
00:52:41,800 --> 00:52:44,160
Speaker 1: UM is probably putting more money to work at the

962
00:52:44,200 --> 00:52:46,480
Speaker 1: margin outside of the US and keeping money in the

963
00:52:46,480 --> 00:52:50,000
Speaker 1: fixed income UM. You know, our our long drumbeat has

964
00:52:50,000 --> 00:52:53,520
Speaker 1: almost been boring, quite frankly. Of there's there's greater risk

965
00:52:53,560 --> 00:52:55,520
Speaker 1: in in the equity market than the bond market. That's

966
00:52:55,520 --> 00:52:57,520
Speaker 1: why you would want there as a long term investor.

967
00:52:57,600 --> 00:53:00,839
Speaker 1: But also let's be cautious of uh, of taking too

968
00:53:00,920 --> 00:53:03,080
Speaker 1: much risk in this market. Greater risk in the equity

969
00:53:03,120 --> 00:53:07,319
Speaker 1: market than the blonde market today. So last question about valuation.

970
00:53:07,520 --> 00:53:10,120
Speaker 1: There was a Wolf Street Journal article. I want to

971
00:53:10,160 --> 00:53:13,000
Speaker 1: say a month or so ago, and maybe it was

972
00:53:13,000 --> 00:53:15,920
Speaker 1: a couple of weeks ago that said, hey, that whole

973
00:53:17,120 --> 00:53:22,759
Speaker 1: fourth quarter eighteen pullback of almost reset valuations to the

974
00:53:22,800 --> 00:53:25,480
Speaker 1: point where there seemed to be sort of reasonable in

975
00:53:25,520 --> 00:53:29,360
Speaker 1: the US exaggeration or or now, I mean they actually

976
00:53:29,320 --> 00:53:32,279
Speaker 1: we're back into our fair value range first time in

977
00:53:32,600 --> 00:53:34,759
Speaker 1: over two years. So it's a general good thing. We

978
00:53:34,760 --> 00:53:36,319
Speaker 1: were still looking from you to you know, a little

979
00:53:36,320 --> 00:53:39,440
Speaker 1: bit more mute returns just because um, we have lower

980
00:53:39,480 --> 00:53:41,520
Speaker 1: expected returns for the risk free rate, for the cash

981
00:53:41,600 --> 00:53:44,200
Speaker 1: rate the Fed funds, and that hasn't changed. We've been

982
00:53:44,280 --> 00:53:46,040
Speaker 1: you know, we've been on that mind for a long time.

983
00:53:46,120 --> 00:53:48,360
Speaker 1: So uh but yeah, we're I do not you know,

984
00:53:48,400 --> 00:53:50,680
Speaker 1: we were not alarm us on the market. Um, I

985
00:53:50,719 --> 00:53:52,520
Speaker 1: think you know, the investment of ourn going forward, we

986
00:53:52,600 --> 00:53:55,719
Speaker 1: said for two years, barrier, it's it's gonna require diligence

987
00:53:55,760 --> 00:53:58,200
Speaker 1: and patients. And I'm not a patient person because you

988
00:53:58,239 --> 00:54:00,400
Speaker 1: have a low expected return, but you can't void to

989
00:54:00,560 --> 00:54:03,879
Speaker 1: miss periods when when that risk premium is rewarding you.

990
00:54:04,280 --> 00:54:06,520
Speaker 1: So you know, I think the temptation is going to

991
00:54:06,560 --> 00:54:09,440
Speaker 1: be to what I call shiny new objects. Do you

992
00:54:09,560 --> 00:54:11,839
Speaker 1: got a how our return? You know, not to say

993
00:54:11,840 --> 00:54:14,239
Speaker 1: that that's some you know it just gotta be careful here.

994
00:54:14,400 --> 00:54:17,239
Speaker 1: I think you gotta just stay stick to the plan.

995
00:54:17,360 --> 00:54:19,560
Speaker 1: If you're gonna take all more well, and if you're

996
00:54:19,600 --> 00:54:21,640
Speaker 1: gonna take all more risks, do it eyes wide open.

997
00:54:21,800 --> 00:54:25,000
Speaker 1: It doesn't mean one doesn't change one's plan. I just

998
00:54:25,080 --> 00:54:27,800
Speaker 1: think that are my job at Vanguard and my team's

999
00:54:27,840 --> 00:54:29,719
Speaker 1: job is just to help convey the risk and the

1000
00:54:29,760 --> 00:54:33,920
Speaker 1: trade offs other investors trying to make tough choices under uncertainty.

1001
00:54:34,120 --> 00:54:36,480
Speaker 1: More more often than not, it's it's a good reason

1002
00:54:36,560 --> 00:54:39,120
Speaker 1: not to change when you when you understand where the

1003
00:54:39,200 --> 00:54:42,919
Speaker 1: risks are. Um. But that shouldn't mean that investors don't

1004
00:54:42,920 --> 00:54:46,400
Speaker 1: necessarily never you know, don't ever change. Just let's be

1005
00:54:46,480 --> 00:54:48,640
Speaker 1: let's be mindful of what the trade off we're making.

1006
00:54:49,120 --> 00:54:51,320
Speaker 1: So I know I only have you for a limited

1007
00:54:51,360 --> 00:54:53,680
Speaker 1: amount of time, and I wanted to get to my

1008
00:54:53,760 --> 00:54:57,520
Speaker 1: favorite questions. Let's let's uh, and I know you get

1009
00:54:57,560 --> 00:55:00,360
Speaker 1: to listen to these when you're out running Saturday morning,

1010
00:55:00,480 --> 00:55:03,040
Speaker 1: so let me uh, let me jump right in this.

1011
00:55:03,480 --> 00:55:06,960
Speaker 1: Tell us the most important thing people don't know about

1012
00:55:07,040 --> 00:55:10,680
Speaker 1: Joe Davis. So the little personal thing is I grew

1013
00:55:10,760 --> 00:55:13,799
Speaker 1: up ten minutes from aguards building, which is which is astonishing,

1014
00:55:13,800 --> 00:55:16,040
Speaker 1: astonished thing. If I actually had an arm, if I

1015
00:55:16,080 --> 00:55:18,920
Speaker 1: could have actually played baseball professional, I could probably hit

1016
00:55:19,000 --> 00:55:22,200
Speaker 1: my my parents house. The other thing is I was actually,

1017
00:55:22,400 --> 00:55:24,640
Speaker 1: to my understanding, I was one of the few, effect

1018
00:55:24,719 --> 00:55:28,120
Speaker 1: that perhaps the only non academic to have been led

1019
00:55:28,160 --> 00:55:30,799
Speaker 1: in the National Bureau of Economic Research, So you want

1020
00:55:30,800 --> 00:55:33,640
Speaker 1: to do. My dissertation was on economic history, not a

1021
00:55:33,719 --> 00:55:38,120
Speaker 1: very popular topic. It's kind of had a Renaissance history,

1022
00:55:38,200 --> 00:55:40,760
Speaker 1: not economic no, it's economics. But I did it. I

1023
00:55:40,760 --> 00:55:45,320
Speaker 1: I created an effectively of a pre GDP GDP measure

1024
00:55:45,360 --> 00:55:48,120
Speaker 1: going all the way back to the seventeen nineties. I

1025
00:55:48,160 --> 00:55:49,759
Speaker 1: didn't know what I was getting into. If I had

1026
00:55:49,800 --> 00:55:51,920
Speaker 1: known how much work it was, very I would have

1027
00:55:51,960 --> 00:55:54,480
Speaker 1: never have done it. For the nineteenth century, an annual

1028
00:55:54,520 --> 00:55:58,200
Speaker 1: measure of business cycles and economic activity. And um I

1029
00:55:58,280 --> 00:56:00,799
Speaker 1: was you know. The the NBR urges at the time

1030
00:56:00,800 --> 00:56:04,160
Speaker 1: were very courteous uh to allow me to to to

1031
00:56:04,200 --> 00:56:08,240
Speaker 1: participate formally. Eventually they kicked me out because I'm I'm

1032
00:56:08,280 --> 00:56:10,319
Speaker 1: in the private sector. I think that's fair. But to

1033
00:56:10,400 --> 00:56:13,799
Speaker 1: this day I'm a I'm a fervent reader and participant

1034
00:56:13,840 --> 00:56:17,600
Speaker 1: in economic history. Quite quite fascinating. Who were some of

1035
00:56:17,640 --> 00:56:20,560
Speaker 1: your early mentors. But the first one was before I

1036
00:56:20,600 --> 00:56:23,120
Speaker 1: came to Vanguard. So after my first year duke in

1037
00:56:23,160 --> 00:56:26,200
Speaker 1: the PhD program, I actually I left because I was

1038
00:56:26,280 --> 00:56:28,680
Speaker 1: unsure if I wanted to go into academia. And I

1039
00:56:28,719 --> 00:56:31,560
Speaker 1: worked for a company right in Westchester, Pennsylvania, again five

1040
00:56:31,600 --> 00:56:33,759
Speaker 1: minutes from where I grew up, So I don't I

1041
00:56:33,760 --> 00:56:36,720
Speaker 1: tend to stay close to home here Barry as a theme, uh.

1042
00:56:36,760 --> 00:56:39,120
Speaker 1: And I worked for now what's called um, you know,

1043
00:56:39,120 --> 00:56:42,360
Speaker 1: Moody's economy doctor. So I'm worked with Mark Zandi, a

1044
00:56:42,400 --> 00:56:45,560
Speaker 1: great experience. Uh. I learned from Mark some of the

1045
00:56:45,560 --> 00:56:48,560
Speaker 1: things they you don't learn as an economist in grad school,

1046
00:56:48,719 --> 00:56:52,360
Speaker 1: the economic data, how to really right well for particularly

1047
00:56:52,360 --> 00:56:55,759
Speaker 1: a non academic audience, how to present to a too

1048
00:56:55,880 --> 00:56:59,759
Speaker 1: large audience with not being ton esoteric. Uh. So he

1049
00:56:59,800 --> 00:57:02,560
Speaker 1: was great mentor. I learned a lot. And Zandy, if

1050
00:57:02,600 --> 00:57:06,160
Speaker 1: memory serves, was chief economic advisor to Vice President Biden.

1051
00:57:06,239 --> 00:57:08,200
Speaker 1: Is that I think he was. In fact, he's he's

1052
00:57:08,239 --> 00:57:11,200
Speaker 1: a he's now a close neighbor of mine, and actually

1053
00:57:11,280 --> 00:57:15,160
Speaker 1: I see him running sometimes on the weekend. So again

1054
00:57:15,239 --> 00:57:18,919
Speaker 1: I have high praise from another early mentor. Was Bob

1055
00:57:18,920 --> 00:57:21,640
Speaker 1: Outwood or at Vanguard? He took chances on me. He

1056
00:57:21,680 --> 00:57:23,800
Speaker 1: could have hired any economists. Now, I was the only

1057
00:57:23,840 --> 00:57:25,920
Speaker 1: economist of Vangar, so maybe he didn't have much choice.

1058
00:57:25,960 --> 00:57:28,920
Speaker 1: But Bob, Bob was the head of fixed income. He

1059
00:57:29,000 --> 00:57:32,200
Speaker 1: was tough, he was demanding. He was also fair, and

1060
00:57:32,280 --> 00:57:35,480
Speaker 1: I learned a lot from him. And again I will

1061
00:57:35,520 --> 00:57:38,520
Speaker 1: always oh Bob and many others at Vanguard for taking

1062
00:57:38,560 --> 00:57:42,480
Speaker 1: chances on me. So let's talk about investors who influenced

1063
00:57:42,480 --> 00:57:46,400
Speaker 1: the way you look at the world of UH data

1064
00:57:46,680 --> 00:57:50,280
Speaker 1: and valuation and investment. I'll give you two, Um, I'll

1065
00:57:50,280 --> 00:57:53,040
Speaker 1: give you three. One is uh you know Jack Bogel

1066
00:57:53,160 --> 00:57:57,600
Speaker 1: clearly um Uh. I knew of his work and was

1067
00:57:57,720 --> 00:58:00,440
Speaker 1: educated myself before I came to Vanguard, but then I

1068
00:58:00,480 --> 00:58:03,360
Speaker 1: realized how much I did not know. Um. Secondly, was

1069
00:58:03,440 --> 00:58:05,920
Speaker 1: even something I started reading in high school. Burt Malkiel

1070
00:58:06,040 --> 00:58:07,760
Speaker 1: Random Walked Down Wall Street was one of the first

1071
00:58:07,760 --> 00:58:10,720
Speaker 1: books around investments that I ever read. Marry now and

1072
00:58:10,800 --> 00:58:12,960
Speaker 1: it's like eleventh edition, I think I had. I had

1073
00:58:12,960 --> 00:58:14,720
Speaker 1: to read it twice because I didn't understand it all

1074
00:58:14,720 --> 00:58:18,040
Speaker 1: the first time. Um. And then more recently, you know, uh,

1075
00:58:18,240 --> 00:58:22,840
Speaker 1: individuals such as Cliff Assess uh at a q r UM.

1076
00:58:22,880 --> 00:58:24,520
Speaker 1: You know, I'm a fan of their research, and I

1077
00:58:24,600 --> 00:58:26,240
Speaker 1: think they do good work, and I think they treat

1078
00:58:26,320 --> 00:58:30,320
Speaker 1: data with the humility and respected deserves. So you mentioned

1079
00:58:30,320 --> 00:58:33,160
Speaker 1: a couple of books earlier as well as Random down

1080
00:58:33,240 --> 00:58:36,080
Speaker 1: Wall Street. Tell us about some of your favorite books,

1081
00:58:36,240 --> 00:58:39,760
Speaker 1: be they finance or not, fiction or not. What what

1082
00:58:39,800 --> 00:58:41,480
Speaker 1: do you like and what are you reading? Well, you

1083
00:58:41,480 --> 00:58:43,439
Speaker 1: know some of the recent stuff that I was reading

1084
00:58:43,480 --> 00:58:47,360
Speaker 1: around the Idea multiplier, give you one, the Idea Factory,

1085
00:58:47,520 --> 00:58:51,480
Speaker 1: so fascinating study around Bell Labs, always going back to

1086
00:58:51,520 --> 00:58:55,000
Speaker 1: the twenties, wonderful. I mean there's a great story if

1087
00:58:55,000 --> 00:58:57,040
Speaker 1: you even wonder where the freight or the word cell

1088
00:58:57,040 --> 00:58:59,920
Speaker 1: phone came from. Uh, and their stories of them trying

1089
00:59:00,000 --> 00:59:04,080
Speaker 1: the test radio cell towers and at nighttime in Philly

1090
00:59:04,200 --> 00:59:06,400
Speaker 1: driving around because they didn't know how to where to

1091
00:59:06,400 --> 00:59:09,080
Speaker 1: put the antenna. I mean, it's some great stories. I'm

1092
00:59:09,120 --> 00:59:12,200
Speaker 1: a great reader of I try to read a lot

1093
00:59:12,280 --> 00:59:17,640
Speaker 1: on on on political and economic history. So anything written

1094
00:59:17,680 --> 00:59:21,440
Speaker 1: by David McCulloch, you know, The Wright Brothers is his best. Uh.

1095
00:59:21,440 --> 00:59:24,720
Speaker 1: It's fascinating book. Uh. In my in my judgment, I

1096
00:59:24,760 --> 00:59:26,680
Speaker 1: read a lot on Um. If you want to read

1097
00:59:26,760 --> 00:59:30,560
Speaker 1: a little bit more of an alarming UH study on

1098
00:59:30,680 --> 00:59:32,760
Speaker 1: between the tensions of the U. S and China, you

1099
00:59:32,760 --> 00:59:36,840
Speaker 1: can build Michael Pillsbury the hundred Year Marathon. Um. You know,

1100
00:59:36,840 --> 00:59:38,640
Speaker 1: I don't necessarily agree with all of it, but it's

1101
00:59:38,720 --> 00:59:41,800
Speaker 1: it's worth a read. Um. I Also, my wife and

1102
00:59:41,840 --> 00:59:44,440
Speaker 1: I love to cook, so I have some favorite cookbooks.

1103
00:59:44,440 --> 00:59:47,120
Speaker 1: We probably have add of them if you want. Really,

1104
00:59:47,160 --> 00:59:49,880
Speaker 1: if you care about good barbecue. My friend at Vanguard,

1105
00:59:49,920 --> 00:59:54,120
Speaker 1: he turned me on to Franklin's Barbecue. So it's a barbecue, yeah,

1106
00:59:54,960 --> 00:59:57,520
Speaker 1: it is, it is. I I think I've underlined more

1107
00:59:57,520 --> 00:59:59,760
Speaker 1: in that book than I have my economics textbooks and

1108
00:59:59,760 --> 01:00:02,360
Speaker 1: grab school. If you want to know how to cook

1109
01:00:02,400 --> 01:00:06,240
Speaker 1: great brisket, um and barbecue, that's easy to just cook

1110
01:00:06,280 --> 01:00:08,120
Speaker 1: the hell out of it. You no, no, But I

1111
01:00:08,160 --> 01:00:11,120
Speaker 1: tell you this book it Frankly, they give you everything.

1112
01:00:11,200 --> 01:00:13,640
Speaker 1: It's it's a famous I believe they're in Austin, Texas.

1113
01:00:13,720 --> 01:00:16,439
Speaker 1: So I've never been to the restaurant, but I've read

1114
01:00:16,480 --> 01:00:18,960
Speaker 1: their book. It's worth a read. You've been to Austin,

1115
01:00:19,000 --> 01:00:22,520
Speaker 1: I assume, yes, that's a great uh, a great food town.

1116
01:00:23,160 --> 01:00:25,120
Speaker 1: So when you say you and your wife left to cook,

1117
01:00:25,600 --> 01:00:28,200
Speaker 1: do you prepare meals together? Do you do a we'll

1118
01:00:28,240 --> 01:00:30,800
Speaker 1: split up. She does the hard stuff, which is the baking.

1119
01:00:30,960 --> 01:00:35,120
Speaker 1: She's very precise measuring. Despite all my analytical background, I

1120
01:00:35,160 --> 01:00:38,360
Speaker 1: find cooking therapeutic. I I only look in the ingredient lists.

1121
01:00:38,400 --> 01:00:41,640
Speaker 1: I never measure. I can never replicate anything I do.

1122
01:00:41,760 --> 01:00:44,600
Speaker 1: That of course implies that actually tasted good. But uh,

1123
01:00:44,720 --> 01:00:47,400
Speaker 1: I find it. It's actually a good, a creative release,

1124
01:00:47,760 --> 01:00:51,400
Speaker 1: whether it's cutting vegetables or just spending time with the family.

1125
01:00:52,120 --> 01:00:54,520
Speaker 1: I think it's you know, my my big turning point

1126
01:00:54,640 --> 01:00:57,520
Speaker 1: was not worrying whether or not the dish turns out right.

1127
01:00:58,040 --> 01:01:01,360
Speaker 1: He was worried about making a mistake. That that's quite fascinating.

1128
01:01:01,360 --> 01:01:05,440
Speaker 1: We Sunday night, we have a shelf full of cookbooks.

1129
01:01:05,440 --> 01:01:08,200
Speaker 1: We pull a cookbook out and Sunday evening dinner is

1130
01:01:08,240 --> 01:01:13,360
Speaker 1: always a new recipe. Sometimes it's delightful and sometimes not.

1131
01:01:13,560 --> 01:01:18,880
Speaker 1: But it's that process of just messing around. It's fantastic

1132
01:01:18,880 --> 01:01:21,200
Speaker 1: because I'm not a creative person, you know, and so

1133
01:01:21,240 --> 01:01:24,920
Speaker 1: I found that really you are. Your research is creating

1134
01:01:25,000 --> 01:01:27,840
Speaker 1: new ways of analyzing things like I'll take it as

1135
01:01:27,840 --> 01:01:31,320
Speaker 1: a comment. Economists don't always get the creative. That's fair.

1136
01:01:32,320 --> 01:01:35,600
Speaker 1: So tell us about what excites you now, what what

1137
01:01:35,760 --> 01:01:39,000
Speaker 1: changes are you looking forward to in the industry. Well,

1138
01:01:39,040 --> 01:01:41,000
Speaker 1: you know, I'm you know, being part of Vanguard. It's

1139
01:01:41,040 --> 01:01:42,560
Speaker 1: a great company to be a part of. I'm proud

1140
01:01:42,600 --> 01:01:46,880
Speaker 1: of our culture. I'm excited about just all investors globally.

1141
01:01:47,400 --> 01:01:50,600
Speaker 1: I think, um, they're going to have a great opportunity

1142
01:01:50,720 --> 01:01:53,120
Speaker 1: for lower call the adoption of what I think is

1143
01:01:53,120 --> 01:01:56,680
Speaker 1: a high value technology, which is low cost portfolios. I

1144
01:01:56,680 --> 01:01:58,800
Speaker 1: think we're stole only on the third or four fourth

1145
01:01:58,840 --> 01:02:01,840
Speaker 1: inning of this United States. What is it of total

1146
01:02:02,080 --> 01:02:04,120
Speaker 1: But again, if you I I look in the world,

1147
01:02:04,240 --> 01:02:06,280
Speaker 1: I look at the inverse of that, which is probably

1148
01:02:06,400 --> 01:02:09,760
Speaker 1: roughly fifty of investments. Perhaps there are stolen two high

1149
01:02:09,760 --> 01:02:18,480
Speaker 1: cost products, but you're saying is probably stolen too. And

1150
01:02:18,720 --> 01:02:23,040
Speaker 1: if you say a low cost, high value product actively managed,

1151
01:02:23,080 --> 01:02:27,280
Speaker 1: passively managed, perhaps rapid vice around that. Uh, that's the

1152
01:02:27,280 --> 01:02:31,000
Speaker 1: adoption of of a wonderful technology that I think if

1153
01:02:31,000 --> 01:02:32,840
Speaker 1: there's an s curve to it. In the US, we're

1154
01:02:32,840 --> 01:02:35,200
Speaker 1: probably only in the third or fourth inning. In outside

1155
01:02:35,240 --> 01:02:37,480
Speaker 1: the United States, we're probably in the in the game.

1156
01:02:37,600 --> 01:02:40,280
Speaker 1: Just the first inning just started, So I'm I'm excited

1157
01:02:40,280 --> 01:02:44,240
Speaker 1: for investors regards to who who's firm we can bring

1158
01:02:44,280 --> 01:02:47,479
Speaker 1: those certain who brings them those services. But it's exciting time,

1159
01:02:47,520 --> 01:02:50,080
Speaker 1: I think to be an investor despite the low return environment,

1160
01:02:50,240 --> 01:02:53,120
Speaker 1: quite quite fascinating. So tell us about a time you

1161
01:02:53,280 --> 01:02:56,360
Speaker 1: failed and what you learned from the experience. Well too,

1162
01:02:56,360 --> 01:02:59,120
Speaker 1: I mean I felt a lot. I always thought i'd

1163
01:02:59,160 --> 01:03:01,080
Speaker 1: play in the nfl U until I rose. I'm only

1164
01:03:01,120 --> 01:03:04,000
Speaker 1: five ft nine, so that that What did you play

1165
01:03:04,000 --> 01:03:05,960
Speaker 1: in high school in college? I played in high school.

1166
01:03:05,960 --> 01:03:07,800
Speaker 1: I was lucky enough to be on the team, so

1167
01:03:07,880 --> 01:03:10,920
Speaker 1: I learned a lot of failure Athletically, I tend to

1168
01:03:10,920 --> 01:03:14,680
Speaker 1: be a better student. Um so I learned humility early

1169
01:03:14,720 --> 01:03:16,240
Speaker 1: in life. But I tell you one time that's stuck

1170
01:03:16,280 --> 01:03:18,120
Speaker 1: with me and failed. I mean, I generally got very

1171
01:03:18,120 --> 01:03:19,800
Speaker 1: good grades, which is why you go to grad school.

1172
01:03:19,800 --> 01:03:21,360
Speaker 1: I tried to stay in school as long as possible.

1173
01:03:21,560 --> 01:03:24,240
Speaker 1: With my first class down in Duke in the PhD

1174
01:03:24,320 --> 01:03:28,720
Speaker 1: program was for game theory, so leading uh teacher in

1175
01:03:28,720 --> 01:03:32,120
Speaker 1: in World game theory her Ay Mulan, And the first

1176
01:03:32,160 --> 01:03:34,400
Speaker 1: test I knew I didn't do well, but he writes

1177
01:03:34,400 --> 01:03:36,760
Speaker 1: on the board, what the average was it was a twelve.

1178
01:03:37,720 --> 01:03:40,680
Speaker 1: I got an eight. And now I was realized, this

1179
01:03:40,840 --> 01:03:42,680
Speaker 1: is not out of a hundred. It was out of

1180
01:03:42,680 --> 01:03:45,280
Speaker 1: a hundred. Really, I didn't realize it was out. I'm

1181
01:03:45,280 --> 01:03:50,440
Speaker 1: assumed maybe the wake up call. So what the lesson

1182
01:03:50,560 --> 01:03:53,680
Speaker 1: was a failing? I can't first actually failing that class.

1183
01:03:53,680 --> 01:03:55,600
Speaker 1: First I realized two things. One is, I'm never going

1184
01:03:55,640 --> 01:03:58,440
Speaker 1: to be a micro economist. Secondly, you're not as smart,

1185
01:03:58,480 --> 01:04:02,000
Speaker 1: Joe as you think you are. And so I think,

1186
01:04:02,040 --> 01:04:04,640
Speaker 1: I like to think I'm a humble person, but every

1187
01:04:04,720 --> 01:04:06,840
Speaker 1: so often, as my mom says, it's it's good to

1188
01:04:07,000 --> 01:04:09,240
Speaker 1: eat a little humble pie. And so that was a

1189
01:04:09,240 --> 01:04:10,920
Speaker 1: great lesson to me, the need for hard work. It

1190
01:04:11,000 --> 01:04:13,439
Speaker 1: was also a testament that is, if you work hard enough,

1191
01:04:13,920 --> 01:04:17,160
Speaker 1: you can learn a lot of things. And so to

1192
01:04:17,240 --> 01:04:20,440
Speaker 1: this day that that test is sear to my were

1193
01:04:20,520 --> 01:04:23,240
Speaker 1: on my brain of you know when those days happen,

1194
01:04:23,280 --> 01:04:26,520
Speaker 1: because they do happen, you can recover if you're willing

1195
01:04:26,560 --> 01:04:28,600
Speaker 1: to put in the hard work. What do you do

1196
01:04:28,680 --> 01:04:30,080
Speaker 1: for fun? What do you do when you're out of

1197
01:04:30,120 --> 01:04:32,840
Speaker 1: the office. Such time a time of my family, my wife,

1198
01:04:33,440 --> 01:04:36,600
Speaker 1: we've been together a long time, ever since college, when

1199
01:04:36,680 --> 01:04:39,160
Speaker 1: she accepted my offer for a first date. I'm a

1200
01:04:39,240 --> 01:04:42,080
Speaker 1: lucky man two children who are growing up quickly. I

1201
01:04:42,120 --> 01:04:45,440
Speaker 1: have fifteen and thirteen year old who weren't born yet

1202
01:04:45,480 --> 01:04:51,320
Speaker 1: when I came to Vanguards. So uh um, yeah maybe,

1203
01:04:51,400 --> 01:04:53,720
Speaker 1: But I mean I try to. I try to read

1204
01:04:53,760 --> 01:04:57,000
Speaker 1: as much. I I'm a firm beliader believer in reading.

1205
01:04:57,040 --> 01:04:59,680
Speaker 1: I believe everyone should read. It's just my humble opinion.

1206
01:05:00,080 --> 01:05:03,400
Speaker 1: Least three hours a day, three hours, three hours I think.

1207
01:05:05,160 --> 01:05:07,200
Speaker 1: I try. I try to get up early to read.

1208
01:05:07,280 --> 01:05:10,520
Speaker 1: I make up for lost time on the weekend. But

1209
01:05:10,560 --> 01:05:12,640
Speaker 1: if it's not spent with a family, you'll probably find

1210
01:05:12,680 --> 01:05:17,240
Speaker 1: me either reading history or the latest technology or or math.

1211
01:05:17,640 --> 01:05:21,040
Speaker 1: Uh to keep abreast of technology trends. I don't care

1212
01:05:21,040 --> 01:05:22,560
Speaker 1: as much of what I am reading as long as

1213
01:05:22,560 --> 01:05:26,800
Speaker 1: I feel like I'm being intellectually um challenge and remaining

1214
01:05:26,800 --> 01:05:30,720
Speaker 1: into actually curious. So you're still a runner, are you doing? Oh?

1215
01:05:30,880 --> 01:05:33,120
Speaker 1: Just I just try to stay you know, just try

1216
01:05:33,160 --> 01:05:36,160
Speaker 1: to stay fit. I realized in with every passing day

1217
01:05:36,200 --> 01:05:41,200
Speaker 1: my metabolism is slower than the day before. So uh again.

1218
01:05:41,240 --> 01:05:44,560
Speaker 1: I also find I'm actually better at research and creativity

1219
01:05:44,920 --> 01:05:48,080
Speaker 1: the more I do work out, so I've gotten less

1220
01:05:48,120 --> 01:05:52,560
Speaker 1: into the heavyweights like TRX, kettlebells. Bill McNab obviously, you know,

1221
01:05:52,880 --> 01:05:55,040
Speaker 1: I know gentlemen of he turned me onto a lot

1222
01:05:55,040 --> 01:05:58,320
Speaker 1: of different exercise. He's he's great, so I'm I should

1223
01:05:58,320 --> 01:06:02,040
Speaker 1: ask him what's his next lady? You know exercise technique.

1224
01:06:02,160 --> 01:06:06,480
Speaker 1: I'd become intrigued by two exercises that are so different.

1225
01:06:07,080 --> 01:06:10,040
Speaker 1: One is rowing, oh my son rose, and the other

1226
01:06:10,200 --> 01:06:13,240
Speaker 1: is boxing. Boxing. Yes, I have, I installed it. We

1227
01:06:13,320 --> 01:06:17,960
Speaker 1: got we last last Christmas boxing down in our basement

1228
01:06:18,000 --> 01:06:22,080
Speaker 1: of boxing bag. So speedbag or ahead no heavy bag. Yeah,

1229
01:06:22,080 --> 01:06:24,200
Speaker 1: it hurts, it hurts the risk when you first start,

1230
01:06:24,240 --> 01:06:26,680
Speaker 1: but it's worth It's a good I've been doing that

1231
01:06:26,720 --> 01:06:28,840
Speaker 1: in the winter because sometimes you can't run on the

1232
01:06:28,920 --> 01:06:32,440
Speaker 1: bekend with the ice. But yeah, it's like whatever you do,

1233
01:06:32,480 --> 01:06:34,720
Speaker 1: as long as you diversify a little bit, keeps up

1234
01:06:34,760 --> 01:06:37,000
Speaker 1: the excitement. A question I should have asked you earlier,

1235
01:06:37,040 --> 01:06:40,400
Speaker 1: but I'm finding that there's some fascinating answers to this.

1236
01:06:41,000 --> 01:06:43,959
Speaker 1: What was the year making model of your first car?

1237
01:06:44,240 --> 01:06:49,400
Speaker 1: Oh Man, I was sixteen. My parents said, if you

1238
01:06:49,400 --> 01:06:51,920
Speaker 1: get good enough grades, you can actually drive to school,

1239
01:06:51,920 --> 01:06:57,640
Speaker 1: which was a big deal. It was a Chevy Cavalier White.

1240
01:06:58,080 --> 01:07:04,760
Speaker 1: It's probably a eight six, a piece of crap. But

1241
01:07:04,760 --> 01:07:07,760
Speaker 1: but two guys like you and I cars meant so

1242
01:07:07,800 --> 01:07:09,520
Speaker 1: I was actually I don't think I don't think it

1243
01:07:09,520 --> 01:07:11,160
Speaker 1: means the same thing. Yeah, but you know my parents

1244
01:07:11,160 --> 01:07:13,240
Speaker 1: I give my parents, you know, they you know, I

1245
01:07:13,320 --> 01:07:16,360
Speaker 1: was actually lucky, unfortunate to have my own car. I'm sixteen,

1246
01:07:16,560 --> 01:07:18,520
Speaker 1: and that was nicer than my first well and my

1247
01:07:18,600 --> 01:07:20,720
Speaker 1: dead But when my daddy always said, in institute such

1248
01:07:20,720 --> 01:07:22,760
Speaker 1: a lesson. You have to pay for your own insurance

1249
01:07:22,800 --> 01:07:24,960
Speaker 1: and you have to pay for all the gas. So

1250
01:07:25,000 --> 01:07:27,040
Speaker 1: it's get a free rod. So we'll get a job.

1251
01:07:27,120 --> 01:07:28,560
Speaker 1: And uh and by the way, you have to keep

1252
01:07:28,640 --> 01:07:30,760
Speaker 1: up the grades while you do it, so that that's

1253
01:07:30,840 --> 01:07:35,240
Speaker 1: quite interesting. So our final two questions. A millennial or

1254
01:07:35,320 --> 01:07:37,880
Speaker 1: recent college grad comes up to you and says they're

1255
01:07:37,960 --> 01:07:40,880
Speaker 1: interested in the career in finance. What sort of advice

1256
01:07:40,880 --> 01:07:42,320
Speaker 1: would you give them. I go back to that I

1257
01:07:42,400 --> 01:07:45,880
Speaker 1: said before read read read. I mean three hours a day,

1258
01:07:45,960 --> 01:07:48,600
Speaker 1: everything that did that's going on in the profession, and

1259
01:07:48,680 --> 01:07:53,080
Speaker 1: everything tangential to that practitioner, research books of the leading

1260
01:07:53,120 --> 01:07:55,960
Speaker 1: authorities in the field. I mean creating new so in

1261
01:07:56,000 --> 01:07:59,360
Speaker 1: my field, investment research or even portfolio management, Barry, if

1262
01:07:59,400 --> 01:08:01,160
Speaker 1: we can stand in on the shoulders of what others

1263
01:08:01,200 --> 01:08:05,120
Speaker 1: have written, that's the and so if you can just

1264
01:08:05,160 --> 01:08:08,080
Speaker 1: have a good understanding what other smart people have commented about,

1265
01:08:08,360 --> 01:08:11,640
Speaker 1: that is the context that allows you to incrementally perhaps

1266
01:08:11,640 --> 01:08:14,800
Speaker 1: contribute to the debate. So read, read, read what I'd

1267
01:08:14,840 --> 01:08:17,960
Speaker 1: be doing on both the math side and the history.

1268
01:08:18,000 --> 01:08:20,439
Speaker 1: I think the one mistake the economics profession made pre

1269
01:08:20,560 --> 01:08:23,760
Speaker 1: GFC is too much math, too little history. That makes

1270
01:08:23,800 --> 01:08:26,760
Speaker 1: perfect sense. And our final question, what is it that

1271
01:08:26,800 --> 01:08:30,840
Speaker 1: you know about the world of economics and investing today

1272
01:08:30,880 --> 01:08:34,720
Speaker 1: that you wish you knew thirty years ago? I underestimated

1273
01:08:34,760 --> 01:08:38,599
Speaker 1: the power of compounding. Really, I knew same was important

1274
01:08:38,680 --> 01:08:42,360
Speaker 1: my parents. My dad turned me onto Vanguard Investing with

1275
01:08:42,439 --> 01:08:46,720
Speaker 1: my summer law mowing and construction money. But uh, I

1276
01:08:46,840 --> 01:08:48,559
Speaker 1: tell you this, I mean so, I tell you before

1277
01:08:48,600 --> 01:08:53,400
Speaker 1: I had really learned the benefits of Vanguard Investing, I'm

1278
01:08:53,400 --> 01:08:55,759
Speaker 1: down in grad school. I'm using I was using Amazon

1279
01:08:55,800 --> 01:08:59,160
Speaker 1: as early. If you remember ordering Amazon ninety five, you

1280
01:08:59,200 --> 01:09:00,880
Speaker 1: get a free coffee mug with a new book. I

1281
01:09:00,880 --> 01:09:03,679
Speaker 1: had to write them to say stopped sending me called mugs.

1282
01:09:04,160 --> 01:09:08,120
Speaker 1: I owned Amazon stock in and I sold it in

1283
01:09:08,160 --> 01:09:11,880
Speaker 1: two thousand and one for like single digits. To this day,

1284
01:09:11,920 --> 01:09:15,400
Speaker 1: I refused to I refused to calculate what I've lost,

1285
01:09:15,439 --> 01:09:18,200
Speaker 1: but power of compounding sting invested into markets that was

1286
01:09:18,479 --> 01:09:21,800
Speaker 1: somehow since I've learned at Vanguard, Joe, thank you so much.

1287
01:09:21,840 --> 01:09:25,680
Speaker 1: This has been absolutely fascinating. We have been speaking with

1288
01:09:25,800 --> 01:09:29,840
Speaker 1: Joe Davis, chief economist and UH chief cook and bottle

1289
01:09:29,880 --> 01:09:34,520
Speaker 1: washer over at the Vanguard Group. If you enjoy this conversation,

1290
01:09:34,560 --> 01:09:36,759
Speaker 1: well look up an intro Down an Inch on Apple

1291
01:09:36,800 --> 01:09:39,479
Speaker 1: iTunes and you can see any of our other two

1292
01:09:39,560 --> 01:09:42,800
Speaker 1: hundred and fifty or so such conversations that we've held

1293
01:09:42,800 --> 01:09:46,280
Speaker 1: over the previous five years. We love your comments, feedback

1294
01:09:46,320 --> 01:09:49,800
Speaker 1: and suggestions right to us at m IB podcast at

1295
01:09:49,800 --> 01:09:52,640
Speaker 1: Bloomberg dot net. Go over to iTunes, give us a

1296
01:09:52,680 --> 01:09:56,280
Speaker 1: five star review. If you enjoy this conversation, I would

1297
01:09:56,320 --> 01:09:59,960
Speaker 1: be remiss if I did not thank our craft team

1298
01:10:00,000 --> 01:10:03,479
Speaker 1: who helps put this together each week. Medina Parwana is

1299
01:10:03,520 --> 01:10:07,839
Speaker 1: our producer and audio engineered. Taylor Riggs is our booker.

1300
01:10:08,320 --> 01:10:12,559
Speaker 1: Attica val Bron is our project manager. Michael Batnick is

1301
01:10:12,560 --> 01:10:16,439
Speaker 1: our head of research. I'm Barry Ridholts. You've been listening

1302
01:10:16,520 --> 01:10:19,040
Speaker 1: to Masters in Business from Bloomberg Radio