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