Bogleheads® Conference 2024 Financial Historian Richard Sylla in Conversation w/ William Bernstein

00:00:00.000 | (audience applauding)

00:00:03.160 | He's a financial historian.

00:00:06.900 | And to say that Dick Sella is a financial historian

00:00:11.900 | is kind of like saying that Steph Curry shoots hoops, okay?

00:00:16.900 | He is, I think, commonly recognized,

00:00:19.620 | universally recognized as the dean

00:00:22.020 | of American financial historians.

00:00:24.700 | He is the author of A History of Interest Rates,

00:00:28.900 | which is on everybody's shelf who does finance.

00:00:33.660 | And I am just tickled to have Dick here with me.

00:00:39.500 | We heard earlier today a very elegant description

00:00:43.940 | of the mathematics of personal finance.

00:00:48.060 | You know, return, volatility, risk aversion,

00:00:51.780 | and how you plug that into an asset allocation.

00:00:54.980 | And I like to say that investing is half mathematics

00:00:59.980 | and half Shakespeare.

00:01:02.740 | So you heard an hour and a half ago

00:01:06.380 | a very eloquent exposition of the mathematics.

00:01:09.660 | But without the Shakespeare, the history,

00:01:12.320 | and the psychology that feeds into it,

00:01:15.300 | you are dead in the water.

00:01:18.880 | So without further ado,

00:01:21.540 | I'm going to ask Dick a rather offbeat question,

00:01:24.940 | which is, when I checked into the hotel the other day,

00:01:29.700 | the clerk took one look at me and said,

00:01:31.860 | "Yes, you get room 1929."

00:01:35.020 | (audience laughing)

00:01:35.840 | Okay, should I be worried?

00:01:38.500 | - What was the question?

00:01:40.900 | - Oh, the clerk said, "You're in room 1929.

00:01:44.740 | "Should I be worried?"

00:01:46.180 | - Well, I don't think so.

00:01:51.940 | I'm kind of curious as to why they gave you that room.

00:01:54.720 | You know, was it because they thought you were 95 years old?

00:01:59.620 | (laughing)

00:02:00.920 | - I don't think there was anything terribly nefarious,

00:02:03.380 | but I did think that it was one heck of a coincidence.

00:02:05.980 | - So Bill mentioned he was going to ask me that yesterday,

00:02:09.500 | and I thought about it a little bit.

00:02:12.660 | Then I realized my own room was 1521.

00:02:16.760 | And I said, "Why would they put Bill in 1929?"

00:02:21.820 | And me in 1521.

00:02:24.780 | And of course, the answer was immediately obvious

00:02:27.620 | to this historian.

00:02:29.380 | 1521 was the year the Pope excommunicated Martin Luther.

00:02:34.380 | (laughing)

00:02:37.500 | And 1929 was the year

00:02:40.340 | that Reverend Martin Luther King Jr. was born.

00:02:46.460 | So that's the answer, Bill.

00:02:47.700 | - Okay, help.

00:02:49.180 | - The hotel has a sense of history.

00:02:51.580 | (laughing)

00:02:52.420 | - Very, very touche.

00:02:54.660 | All right, so we're going to start with a subject

00:02:59.100 | I think that Dick wanted to begin with,

00:03:01.460 | and it's a good one, we touched on it already,

00:03:04.820 | which is that the United States

00:03:07.120 | has large annual fiscal deficits.

00:03:10.620 | We have a debt to GDP ratio,

00:03:14.660 | which is now approaching one or greater than one,

00:03:18.380 | I don't know the exact value, but it's large.

00:03:21.300 | Which is okay if you've just fought a war,

00:03:24.820 | or maybe if you've just had an enormous financial crash.

00:03:28.780 | But it is not good to have that

00:03:31.100 | at a time of prosperity and a time of peace.

00:03:36.980 | And there doesn't seem to be any end of this in sight.

00:03:40.580 | We seem to be headed toward a debt spiral.

00:03:44.420 | And I'm wondering how worried you are about that

00:03:47.460 | and how worried we all should be about it.

00:03:50.120 | - Well, this does bother me quite a bit,

00:03:52.060 | and I think it should bother most of you,

00:03:53.820 | because I believe it has investment implications

00:03:56.460 | going forward.

00:04:00.060 | And you know, I'm a fairly old guy now,

00:04:03.980 | and half a lifetime ago,

00:04:05.860 | I remember that the U.S. national debt was $1 trillion.

00:04:10.660 | In 1980, that's like, in my case, half a lifetime ago.

00:04:15.380 | And now it's between $35 and $36 trillion.

00:04:20.380 | And think about that.

00:04:21.760 | You know, it took, what, 180 years of American history

00:04:26.680 | to get up a national debt of $1 trillion.

00:04:29.800 | And now in the last 44 years,

00:04:32.640 | we've run that up to $35 trillion.

00:04:35.280 | So that, the number in itself,

00:04:37.080 | is one that's worth thinking about.

00:04:39.860 | But also, you know, you would say that,

00:04:43.520 | you know, what does this represent?

00:04:45.440 | And I think it represents fiscal irresponsibility.

00:04:49.640 | For most of American history,

00:04:52.640 | we were a fiscally responsible country,

00:04:54.940 | but in our political system, you know,

00:04:58.320 | there might have been always a spending party

00:05:00.240 | and another party that was conservative

00:05:01.920 | and said we have to pay for things.

00:05:03.680 | But it seems to me what bothers me most now,

00:05:07.640 | and this is an election year,

00:05:09.720 | but nobody talks about this.

00:05:13.480 | You don't hear the candidates saying,

00:05:15.200 | you know, nobody asks them,

00:05:16.440 | what are we gonna do about this,

00:05:18.100 | having a, you know, trillion plus deficits every year.

00:05:22.480 | And in the background, of course,

00:05:25.620 | it's even worse than it seems

00:05:27.000 | because if you can calculate what Social Security

00:05:30.480 | and Medicare are gonna cost down the road,

00:05:32.840 | and, you know, some of those deficits

00:05:35.520 | dwarf even the, you know, trillion or two deficits

00:05:38.600 | we've been running annually at the federal level.

00:05:42.240 | And so why is it that, you know,

00:05:44.040 | with all this going on,

00:05:45.680 | it doesn't seem to be a major issue.

00:05:47.400 | Neither party talks about it.

00:05:49.080 | And I think it's got implications going forward

00:05:52.940 | for the investment world,

00:05:54.840 | and so we should all be thinking about that a little bit.

00:05:58.400 | - How do you think it plays out?

00:05:59.840 | It's not gonna play out in an election year

00:06:01.680 | or the next five or six weeks.

00:06:03.000 | - No.

00:06:03.840 | - But it's gonna play out after that, I think,

00:06:04.880 | and how do you think that happens?

00:06:05.720 | - Yeah, well, I, you know, what's going on?

00:06:08.160 | This is as old as the hills.

00:06:10.880 | I mean, Alexander Hamilton talked about this

00:06:13.160 | because in the 1790s, we had a,

00:06:16.160 | when the government was first formed,

00:06:17.800 | we had a national debt of $70 million left over

00:06:22.200 | from the American Revolution.

00:06:24.240 | And, you know, we didn't do anything about it in the 1780s,

00:06:28.560 | and so the new government on the Constitution

00:06:31.000 | had to do something about it.

00:06:32.720 | And so Hamilton basically funded the debt,

00:06:36.080 | created the Treasury bond market,

00:06:38.080 | and, you know, founded the first national bank,

00:06:40.760 | central bank.

00:06:41.640 | But he said at the time that everybody was pressuring him

00:06:46.040 | to get us out of debt.

00:06:47.480 | We wanna be out of debt as a country.

00:06:50.840 | And Hamilton would say there are two ways to do that.

00:06:53.080 | You know, we can raise taxes,

00:06:57.320 | and immediately the congressman said,

00:06:59.200 | "No, no, we can't do that, we can't do that."

00:07:02.040 | Or the other way, Hamilton said, is we can reduce spending.

00:07:06.440 | And they said, "Well, we can't do that, we can't do that."

00:07:09.400 | And, but Mr. Hamilton,

00:07:12.200 | we charge you with getting us out of debt.

00:07:15.160 | And Hamilton then said,

00:07:16.560 | this makes life very complicated for a finance minister

00:07:20.200 | because people have these inconsistent views.

00:07:23.360 | And it seems to me that's where we are now.

00:07:25.360 | And many of us would say if somebody proposed,

00:07:28.160 | you know, one of the candidates

00:07:29.280 | would propose much higher taxes this year,

00:07:31.720 | we'd say, "I don't like that,

00:07:32.640 | "I'm not gonna vote for that person."

00:07:34.520 | Or if they talked about reducing spending,

00:07:36.920 | you know, cutting Social Security, cutting Medicare,

00:07:40.680 | we would say, "No, no, I can't vote for that candidate,

00:07:43.280 | "but I'm very disturbed at the growing debt we have."

00:07:46.320 | So we haven't changed much in 200 and some years,

00:07:50.320 | but I think it's really a problem for our country,

00:07:54.840 | and we should all be thinking about it a lot more

00:07:57.080 | and thinking how can we become more fiscally responsible?

00:08:00.920 | - Well, that's, you know, the collective action aspect of it,

00:08:05.000 | but what are you doing about it as an investor?

00:08:07.360 | - Well, my guess is that the,

00:08:12.480 | unless something is done about it,

00:08:14.200 | and I don't see any signs of that right now,

00:08:16.880 | that it means that we will have more inflation in the future

00:08:20.840 | because what inflation is, is the tax,

00:08:25.440 | it's a form of taxation.

00:08:27.760 | And if we won't pay real taxes,

00:08:30.200 | and we won't cut back on our government spending,

00:08:35.200 | because nobody wants to pay higher real taxes,

00:08:37.520 | and nobody wants to have lower government spending,

00:08:40.000 | the only way the books are gonna balance

00:08:41.920 | is if we, inflation reduces the real value of the debt

00:08:46.360 | and makes it possible for the government to come through.

00:08:48.720 | And you know, one of the first things you learn

00:08:50.680 | in EC1 or EC10, whatever the course is,

00:08:53.680 | is that inflation is bad for creditors,

00:08:58.680 | people who lend money,

00:09:01.200 | because they get lower value money back when it's paid,

00:09:04.480 | but it's really good for debtors,

00:09:06.320 | because the debtor can pay back in lower value money.

00:09:12.640 | And then you ask yourself,

00:09:14.680 | who is the biggest debtor in the world?

00:09:17.960 | And the answer is the government

00:09:20.640 | of the United States of America.

00:09:22.880 | So our government actually has a vested interest

00:09:27.880 | in inflation, I would say.

00:09:29.880 | And I think that's something to keep in mind

00:09:32.720 | as you're making your investment decisions.

00:09:34.760 | Been a lot of talk about tips

00:09:36.400 | and things like that at this conference.

00:09:39.520 | And my own view, Bill told me once,

00:09:42.400 | he thought all the old people should invest in tips.

00:09:45.680 | But my view is that a little bit of tips

00:09:49.080 | might belong in almost everyone's portfolio.

00:09:52.360 | And when Consuelo Mack,

00:09:55.480 | I don't know if you know Consuelo Mack

00:09:57.120 | has a TV show called WealthTrack,

00:09:59.880 | and I've been on it a few times.

00:10:01.280 | And at the end of it, she used to ask everyone,

00:10:04.000 | what's your favorite recommended investment?

00:10:07.760 | And I said the same thing all the time.

00:10:10.240 | I thought I was being safe and concerned.

00:10:12.200 | Maybe everybody should have a little bit of tips

00:10:14.600 | in their portfolio.

00:10:16.320 | - I guess I wouldn't disagree with that.

00:10:18.160 | Okay, we're gonna turn the clock back now 13 years

00:10:21.960 | to the year 2011, which was a bit of a scary year.

00:10:25.320 | And you were interviewed for the Wall Street Journal

00:10:29.080 | by Jim Browning, D.S. Browning.

00:10:31.560 | I don't know how he got the name Jim,

00:10:32.760 | but that's what everybody calls him.

00:10:34.520 | And this was a bad week in the stock market

00:10:36.920 | in September of 2011.

00:10:39.080 | And he wanted your very, very long-term perspective.

00:10:42.400 | And so you said that you wanted to take a long-term approach

00:10:47.400 | and you showed him this graph,

00:10:49.200 | which got published in the journal article.

00:10:52.080 | And it's a nice sort of rolling graph

00:10:53.960 | of 10-year returns of the stock market.

00:10:58.640 | And so right at the far right aspect of that

00:11:01.280 | was returns had been near zero.

00:11:04.200 | In fact, as Paul Merriman mentioned a couple times,

00:11:07.600 | and I'm fond of quoting as well,

00:11:09.160 | between 2000 and 2009, that decade,

00:11:11.880 | U.S. stocks lost about 20% in real terms.

00:11:16.320 | And you thought that augured well for the stock market.

00:11:19.640 | You thought that stocks would be a good place to invest.

00:11:24.080 | And of course, you were right.

00:11:26.240 | And so I decided to look and see if there was any value

00:11:30.360 | in looking at 10-year stock returns.

00:11:32.680 | And this is sort of a dirty graph.

00:11:34.520 | It sort of slopes down into the right,

00:11:35.960 | but it's a very dirty graph.

00:11:37.440 | So I lengthened that to 15 years,

00:11:39.720 | and then 20 years, and then finally 30 years.

00:11:43.960 | And boy, at 30 years, it sure looks really pretty

00:11:46.600 | off on the left side, okay?

00:11:48.640 | All you have to do is wait for 30-year real returns

00:11:51.920 | of near 0% or 1% or 2%,

00:11:55.120 | and you have it made in the shade.

00:11:57.840 | Now, the problem with that is there aren't

00:11:59.280 | that many independent 30-year returns.

00:12:04.200 | In fact, when you're looking at the far left side

00:12:06.240 | of that graph, you're only really talking about,

00:12:08.720 | I think, 1830-something and 1938 or something like that.

00:12:12.800 | So really, you have to wait 100 years

00:12:14.880 | to execute this strategy.

00:12:17.560 | And the problem becomes immediately apparent

00:12:19.600 | when you just take rolling 30-year stock returns.

00:12:22.040 | You see that in the past century,

00:12:24.520 | there's been only one period of time,

00:12:26.240 | almost 100 years ago, when we saw real returns,

00:12:29.200 | 30-year returns of near zero.

00:12:31.080 | And even if you held your threshold for buying at 5%,

00:12:36.080 | that you really were only going to have

00:12:39.680 | one or two opportunities, buying opportunities.

00:12:42.680 | So how do you use rolling returns

00:12:46.440 | and realized returns of stocks?

00:12:48.400 | How valuable do you think they are?

00:12:50.600 | - Well, if you want to go back

00:12:53.120 | to the Wall Street Journal chart,

00:12:54.880 | that was, one thing I did in my checkered career

00:12:59.080 | was to actually extend our knowledge

00:13:02.200 | of the U.S. stock market back to almost the beginning.

00:13:05.840 | And the only way you could do that

00:13:07.280 | was by looking at old newspapers,

00:13:09.240 | because the newspapers starting in the 1790s

00:13:11.880 | began to report the stocks then were usually bank stocks,

00:13:16.880 | local bank stocks, and the Bank of the United States.

00:13:19.800 | And then you had three kinds of government bonds

00:13:23.080 | that Hamilton had issued.

00:13:24.440 | And they were reported.

00:13:26.160 | I mean, I think one of the great things about our country

00:13:28.880 | is it had somewhat modern finances right from the beginning.

00:13:33.080 | And that's the debt I think we should all remember

00:13:36.080 | that we owe to Alexander Hamilton.

00:13:38.880 | Because he had this idea that,

00:13:41.560 | he knew his financial history.

00:13:43.240 | If you read about Hamilton,

00:13:44.600 | he would talk about Dutch finance and British finance,

00:13:47.600 | the Italians, and what was going on.

00:13:50.120 | And he thought the U.S. ought to be equipped

00:13:51.960 | with modern financial arrangements.

00:13:53.760 | We were probably the third country in the world

00:13:55.520 | after the Dutch and the British

00:13:57.160 | to have modern financials system.

00:14:00.240 | And we had it right from the beginning of the country.

00:14:03.640 | So you could actually go back and get,

00:14:06.200 | this is from 1801 to 19, to 2010 or something like that.

00:14:10.760 | And so we got the stock market data,

00:14:13.360 | made some assumptions for the earlier,

00:14:15.160 | before we made the 1870 on it, it was easy.

00:14:17.200 | The previous work had been done.

00:14:19.560 | But going back to the beginning of the country.

00:14:21.800 | And what I noticed was that there's this kind of pattern,

00:14:24.480 | up and down, up and down.

00:14:26.640 | And so in the year 2000, actually 1999,

00:14:31.440 | when everybody was worried about the dot-com bubble,

00:14:33.520 | I was asked to give some talk.

00:14:34.800 | And I brought out this chart.

00:14:36.400 | And it was only up to 1999 then.

00:14:40.640 | But I said the 10-year moving average real returns,

00:14:44.560 | that's what this shows,

00:14:45.440 | 10-year moving average real returns,

00:14:47.680 | they've fluctuated a lot through U.S. history.

00:14:50.840 | It looks like there's, roughly speaking,

00:14:54.240 | on average there's 10 years up and 10 years down.

00:14:58.880 | And usually when you got to some very high level,

00:15:02.280 | the range of this at the maximum,

00:15:05.600 | you can see like in 1929 or late 1950s or '60s,

00:15:10.600 | and then again in 1999, when you're up at that level,

00:15:16.440 | maybe 16, 17, 18%, usually what happens

00:15:20.440 | when you're at one of those peaks,

00:15:22.040 | the next 10 years aren't so good.

00:15:24.000 | So what I did in 2000 when I first did this,

00:15:28.640 | and this is what Jim Browning knew about

00:15:30.200 | and why he wrote the article,

00:15:32.240 | is I said, let me assume that the returns

00:15:35.280 | for the next 10 years, that is 2000 to 2009,

00:15:40.080 | will just be 0%, we're talking about

00:15:43.720 | real stock market returns every year, 0%.

00:15:46.640 | And I got the red chart there, the red line.

00:15:50.380 | And it turns out that over the next 10 years,

00:15:53.520 | the blue line is what actually happened

00:15:55.360 | and the red was almost the same as the blue.

00:15:57.320 | So hey, I'm a pretty smart guy, right?

00:16:00.160 | (laughing)

00:16:02.000 | And so Browning thought about that

00:16:05.200 | and he said, well, what's, in 2010, 2011,

00:16:09.120 | I talked to a lot of investment groups in New York

00:16:12.400 | and they want to know what's gonna happen next.

00:16:16.800 | And I said, well, when things are that bad for 10 years,

00:16:20.340 | usually the next 10 years are better.

00:16:23.480 | So then the Wall Street Journal asked me

00:16:26.040 | to calculate what might happen in the next 10 years.

00:16:29.760 | So I made another simple assumption

00:16:31.600 | that let's just suppose the average return

00:16:34.680 | that is throughout US history

00:16:37.120 | is what we'll get in the next 10 years.

00:16:38.980 | And I got, at that time, my forecast

00:16:41.800 | of what the market would do in the next 10 years.

00:16:43.720 | It's actually done a lot better than that

00:16:45.280 | because it's done above average.

00:16:46.860 | But when I made this statement,

00:16:48.560 | it said the next 10 years will be better,

00:16:50.480 | everyone was pessimistic.

00:16:51.760 | Well, no, we don't think you're right.

00:16:53.440 | They really got burned in 2007 to 2009

00:16:57.320 | and they were very skeptical in 2011

00:17:00.360 | that the stock market was gonna do well.

00:17:03.120 | Well, I turned out to have been not optimistic enough.

00:17:06.360 | So, and basically, that's where this comes from.

00:17:08.800 | But you can sort of get an average,

00:17:10.720 | I mean, the range is from a return

00:17:13.640 | of about 16, 17, 18% a year

00:17:16.880 | at the various peaks you see in this 200-year chart.

00:17:20.160 | And the low is down around zero, usually.

00:17:24.520 | And so I think that my guess is to answer the question

00:17:29.520 | is that this pattern will continue.

00:17:33.480 | We're actually much higher now than my forecast,

00:17:36.000 | that red line.

00:17:37.760 | I haven't really updated my,

00:17:39.240 | but I think we're in the last 10 years

00:17:41.800 | of moving average return.

00:17:43.120 | Real return would be something like 15 or 16 or 17%.

00:17:48.120 | So if the past is any guide to the future,

00:17:54.080 | I don't think you should expect really great stock returns,

00:17:57.080 | let's say for the next decade or so.

00:17:59.640 | - Yeah.

00:18:00.480 | Those of us who've been coming to this conference

00:18:03.480 | for a little while know that Jack would go through

00:18:06.800 | an orthogonal episode exercise,

00:18:09.080 | an exercise that was a little different,

00:18:11.600 | but it would arrive at exactly the same conclusion.

00:18:13.640 | He would do a Gordon equation type of exercise

00:18:17.600 | where he would add the dividend yield

00:18:19.560 | and then the dividend growth.

00:18:20.800 | And then he would add in a mean reversion term,

00:18:23.640 | which was basically based

00:18:25.200 | on the cape cyclically adjusted earnings.

00:18:28.120 | And so he came to this conference,

00:18:31.000 | one of the very first ones in 2002,

00:18:34.560 | and basically said, we're looking at zero returns,

00:18:36.680 | nominal returns over the next 10 years.

00:18:38.720 | And in 2011, 2012, he came and was much as optimistic

00:18:42.800 | as you are for, basically amounts to the same reason.

00:18:47.200 | One of my very favorite stories even predates that.

00:18:50.600 | It was in the year 2000.

00:18:52.040 | And I had the pleasure of following him

00:18:55.760 | around New York for a day,

00:18:58.240 | which included a dinner in which I made sure

00:19:00.920 | he had had his second martini before I asked him,

00:19:04.160 | had he changed his asset allocation at all?

00:19:07.320 | Because he had written that you should never, ever do that.

00:19:09.800 | And he sort of looked conspiratorially over his shoulder.

00:19:12.600 | And he said, well, I've sold about five

00:19:14.840 | or 10% of my stocks.

00:19:16.280 | So even he was not--

00:19:19.200 | - He's a market timer.

00:19:20.640 | - Exactly, exactly.

00:19:22.840 | I never held him to that.

00:19:25.280 | Well, all right.

00:19:26.960 | So the next graph, and we'll be done with graphs

00:19:30.200 | here shortly, I apologize for these.

00:19:33.160 | This comes from your book, A History of Interest Rates.

00:19:37.040 | And this is just an example or an illustration

00:19:39.800 | of what's happened to interest rates

00:19:41.160 | over the past millennium, more or less.

00:19:43.800 | Dick pointed out to me when I showed him this graph

00:19:46.000 | that I could have used a much better data set

00:19:47.960 | later on in the book, which would have been even prettier.

00:19:52.200 | But you see that the rate of return on securities

00:19:55.680 | has been falling.

00:19:56.520 | These are debt securities.

00:19:58.160 | And this is work that was done more recently

00:20:01.280 | by Paul Schmelzing.

00:20:02.440 | I guess Rogoff and Rossi got their names on it.

00:20:04.720 | But I think he's the one who did all the legwork.

00:20:07.840 | And what you're looking at is the returns, again,

00:20:10.320 | to debt instruments over the past 700 years or so.

00:20:16.320 | So it shows that the rate of return on investments

00:20:20.800 | is falling.

00:20:22.320 | I think Dick knows I have my own theory as to why this is,

00:20:24.960 | but I'd like to hear your theory

00:20:26.760 | of exactly what's going on here

00:20:28.760 | and what that means to people in this room.

00:20:32.160 | - Well, I want to say a couple things first.

00:20:34.720 | Sidney Homer wrote the book, A History of Interest Rates,

00:20:37.240 | but he passed away around 1980, I think.

00:20:40.840 | And so he did a couple of editions.

00:20:42.520 | But after that, people were still interested

00:20:46.040 | in interest rates.

00:20:47.040 | So I was asked to update the book and keep it going.

00:20:51.480 | And I did a couple of more editions of it.

00:20:54.440 | I think Homer did a great job of getting

00:20:58.000 | the long-term interest rates going way back in history.

00:21:01.400 | I think the earliest hard numbers were the Code of Hammurabi

00:21:05.360 | where cash loans were 20% and grain loans were 33%.

00:21:10.360 | And so this one goes back, let's see,

00:21:15.320 | it goes back to the Middle Ages, I guess.

00:21:17.440 | Homer and I found that there was a long-term trend down

00:21:22.080 | in interest rates.

00:21:24.760 | And that's what Schmelzing finds.

00:21:26.160 | But Schmelzing actually did a lot more work.

00:21:28.440 | He really enriched the database by doing a lot of hard work

00:21:32.160 | in archives in Europe,

00:21:34.000 | things that Homer didn't know about

00:21:36.120 | and I didn't know about either.

00:21:37.680 | But I think they basically get the same thing.

00:21:39.680 | There's been a long-term declining trend

00:21:42.680 | in real interest rates.

00:21:44.880 | And you see they were back in the 1300s, I guess.

00:21:48.720 | They were between 10,

00:21:51.000 | and these are sort of the lowest interest rates,

00:21:54.000 | 10 or 12%.

00:21:55.840 | And then you get down to in the vicinity of zero there

00:22:00.840 | in the early 20th century.

00:22:05.160 | And now it looks more like it's hard

00:22:07.520 | to see exactly where it is, but somewhere positive.

00:22:13.840 | Anyway, Schmelzing, I know him

00:22:16.200 | and we've had some chats and all that.

00:22:18.320 | And he actually tried to be provocative by saying,

00:22:21.760 | this trend is gonna continue.

00:22:23.560 | And one great point in recent years

00:22:25.600 | when interest rates were so low

00:22:27.080 | until the recent Fed raising,

00:22:28.880 | we all thought that was abnormal.

00:22:32.160 | These were abnormally low rates.

00:22:33.640 | And I said myself, I'm very privileged

00:22:36.040 | to have lived in the period I did

00:22:37.680 | because I have seen the highest interest rates

00:22:39.760 | in US history around 1980, '81.

00:22:42.440 | And I have seen the lowest interest rates

00:22:44.200 | in US history in 2010 to 2020.

00:22:47.800 | And Schmelzing said, well,

00:22:51.400 | this is just a long-term trend.

00:22:53.120 | All these people saying interest rates

00:22:55.000 | are really unusually low

00:22:57.200 | and they aren't gonna stay that way a few years ago.

00:22:59.680 | Schmelzing says, no, no,

00:23:01.040 | we're right where we should be in history.

00:23:02.800 | And in fact, they're gonna go even lower

00:23:04.760 | and money is sort of gonna be freely available.

00:23:08.480 | The real interest rate will be in the vicinity of zero

00:23:12.680 | in just a few years.

00:23:14.720 | Well, that was provocative, I think.

00:23:16.360 | But I think what the low rates recently are sort of rigged,

00:23:21.360 | I call it financial repression.

00:23:24.640 | I mean, the Fed buying mortgage bonds

00:23:26.880 | and keeping the rates low.

00:23:30.440 | I think we've seen now in the last couple of years

00:23:33.640 | the normalization that I would have expected.

00:23:36.440 | - Yeah, so financial economists like to talk about,

00:23:40.160 | I think it's R*, which is the natural rate of interest.

00:23:44.200 | And you think that R* is about 2%.

00:23:47.840 | - Yeah, I would think so.

00:23:48.760 | I think, you know, I just have a feeling in my bones

00:23:51.120 | that there's probably some theory that could predict it,

00:23:53.760 | that the R* is roughly the rate,

00:23:58.760 | real rate of economic growth of the economy.

00:24:01.640 | So the 20th century, we grew at about 3%,

00:24:05.120 | I think, per year, real economic growth.

00:24:07.560 | In the 19th century, it was about 4%.

00:24:10.320 | And more lately, we're thinking,

00:24:12.880 | well, 2% growth is really not so bad.

00:24:16.160 | And I think the natural rate of interest

00:24:18.120 | is something like the real growth rate of the economy.

00:24:21.840 | And so I think it might be about 2% now,

00:24:26.080 | because that seems to be how fast we can grow.

00:24:29.280 | - Yeah, that's interesting.

00:24:30.640 | I mean, I read the same, Schmelzing's working paper,

00:24:34.840 | and then this paper.

00:24:36.040 | And I have to admit that I thought to myself,

00:24:38.960 | my gosh, this guy is prescient,

00:24:40.960 | because we are looking at zero and negative real rates now.

00:24:44.040 | But I think you're right.

00:24:45.080 | I think that those probably are--

00:24:46.920 | - Remember, those are real rates.

00:24:48.280 | So if 2% is the real rate,

00:24:51.680 | and we're having 3% inflation,

00:24:53.560 | then the interest rates might be, you know, 5%.

00:24:58.280 | - So I think the piece of short-term advice

00:25:00.880 | that we would get out of that is,

00:25:02.560 | you don't have to be in a rush to buy TIPS right now.

00:25:05.760 | There may be higher rates on offer at some point later.

00:25:09.560 | - It could be, it could be.

00:25:10.880 | - Yeah.

00:25:11.800 | All right.

00:25:13.280 | So that's the one thing I will point out,

00:25:16.720 | which is that we talked about a session and a half ago,

00:25:20.680 | which is that at this conference last year,

00:25:24.320 | we were like two weeks or a week off of the peak of,

00:25:27.480 | from the peak of TIPS rates.

00:25:31.760 | And there was a lot of excitement and a lot of buzz,

00:25:34.280 | and perhaps too much buzz

00:25:36.200 | and too much excitement about them.

00:25:40.440 | So it's, I'm reasonably heartened,

00:25:43.040 | because I don't want TIPS rates to necessarily fall.

00:25:46.160 | I'd like to be collecting those fat coupons

00:25:48.680 | for the next 20 or 30 years.

00:25:51.640 | I will add that those of you who have questions,

00:25:54.560 | Karen is, and one or two other people are going around.

00:26:00.280 | So if you have questions for us, let us know.

00:26:04.960 | All right, well, you know, the next question that I have,

00:26:09.960 | I guess, has to do with investment frictions.

00:26:14.640 | You were, you came of the financial age

00:26:18.000 | at a time when the financial frictions,

00:26:20.000 | at least by today's standards, were absolutely gargantuan.

00:26:23.640 | When simply it was absolutely impossible

00:26:26.480 | to put together an indexed portfolio,

00:26:30.000 | you know, buy the S&P 500.

00:26:31.440 | People often talk about, you know,

00:26:33.160 | if you'd only invested in the S&P 500

00:26:35.160 | when the Ibsen database incepted in 1926,

00:26:38.360 | you know, you'd have, I think it's $15,000

00:26:41.040 | for every dollar you invested then.

00:26:42.400 | But of course, the problem was that that was uninvestable.

00:26:45.800 | And when it comes to small value stocks,

00:26:48.040 | they really didn't become investable

00:26:49.520 | for the small investor until the early 1990s.

00:26:53.240 | So the returns that you see going back

00:26:55.600 | were returns that were basically

00:26:58.240 | garnered by very, very small business people

00:27:00.640 | who owned shares of small corporations very individually.

00:27:03.720 | There was nobody who could actually own

00:27:05.720 | a small cap value index fund until really 1990, 1992 or so.

00:27:10.720 | And so the question I have for you

00:27:16.520 | is now that you can buy the entire stock market

00:27:19.840 | for a couple of basis points,

00:27:21.440 | or if you're willing to leave your money in Fidelity

00:27:23.320 | for the rest of your life, zero basis points,

00:27:26.840 | you know, how do you think that's impacted

00:27:28.800 | the financial markets

00:27:29.840 | and what individual investors should be doing?

00:27:31.720 | In other words, do you think that that lack of frictions,

00:27:34.520 | the fall in intermediation costs have,

00:27:37.360 | or will lead to lower returns?

00:27:39.240 | - I don't, I can't really see a connection

00:27:43.280 | why the cost of intermediation where we're trading stocks,

00:27:47.880 | you know, which are very low now and almost free, right?

00:27:50.960 | Almost free.

00:27:51.880 | I don't see how that should, I mean,

00:27:55.400 | it should impact returns by saying that,

00:27:58.600 | well, the costs are lower,

00:27:59.920 | so whatever the return is will be better than it would be

00:28:04.920 | if the cost of investing had been higher.

00:28:07.000 | But I don't see a really strong connection.

00:28:10.720 | And, you know, I knew Jack Bogle pretty well.

00:28:12.680 | He was, I considered him a friend

00:28:14.120 | at least for the last 10 years of his life.

00:28:16.680 | And, you know, he would have thought

00:28:18.840 | these low costs of trading were really great,

00:28:23.120 | but he would worry about the implication

00:28:25.280 | that it would, if it was really cheap to trade,

00:28:28.000 | then people would probably do too much trading.

00:28:29.960 | He liked to say, you know,

00:28:31.240 | I remember when he was a visiting professor at NYU,

00:28:34.840 | thanks to the beneficence of Henry Kaufman,

00:28:37.960 | he used to say, when the American people go to bed at night,

00:28:42.800 | they own exactly the same portfolio of stocks

00:28:47.600 | that they owned when they got up in the morning,

00:28:50.320 | which probably isn't true if, you know,

00:28:53.760 | foreigners were buying or selling stock that day

00:28:55.960 | and we were buying.

00:28:56.920 | But anyway, he didn't like the idea

00:28:59.240 | that we should be trading a lot.

00:29:01.240 | But he liked low costs, but he didn't like a lot of trading.

00:29:05.880 | So I, but really, I think, you know,

00:29:10.080 | if we avoid the temptation to overtrade,

00:29:12.960 | and I think, as I understand this very sensible group,

00:29:16.800 | none of you would ever do that.

00:29:18.360 | If we avoid the temptation to overtrade,

00:29:22.080 | we should just be glad that the costs of intermediation

00:29:24.640 | are so low because, you know,

00:29:26.680 | when I bought my first stocks back in the 1960s,

00:29:29.720 | I guess I was buying funds,

00:29:31.000 | but you didn't wanna really trade very much

00:29:35.640 | 'cause the brokerage costs were higher.

00:29:37.880 | Funds had, you know, some of the mutual funds

00:29:40.520 | had seven or 8% upfront charges, you know,

00:29:43.640 | that was really discouraged trading.

00:29:46.920 | I think basically the way our markets

00:29:49.120 | have developed over history

00:29:50.160 | is the way our political system has developed

00:29:53.280 | in the sense that we, more and more people were brought in,

00:29:56.680 | and you know, when Thomas Jefferson said,

00:29:58.840 | "All men are created equal,"

00:30:00.280 | he met all white men with property,

00:30:02.280 | but he didn't include women, he didn't include black people,

00:30:06.400 | he didn't include Native Americans.

00:30:09.120 | But over time, we've become much more inclusive

00:30:11.840 | in who we allow to vote.

00:30:13.760 | I think we've also become much more inclusive

00:30:16.400 | in making investments available to a wider range of people,

00:30:21.400 | and that's been a good thing.

00:30:24.320 | And low costs are certainly something Jack Bogle loved,

00:30:27.480 | so I think they're a good thing,

00:30:28.960 | as long as we avoid the temptation to overtrade.

00:30:32.200 | No day traders in the group, are there?

00:30:34.880 | - Yeah, I mean, when it comes to, you know,

00:30:37.000 | trading and buying versus buying and holding,

00:30:39.240 | I think that this particular room

00:30:40.520 | is almost a point singularity in this quadrant of the galaxy.

00:30:44.880 | Out there, the rest of the world,

00:30:47.480 | and the way they emotionally approach investing

00:30:49.800 | is somewhat different, although, you know, in fairness,

00:30:53.480 | the use of target date funds as default vehicles

00:30:58.320 | in defined contribution plans

00:31:00.720 | certainly has been, you know,

00:31:01.960 | brought about a real improvement.

00:31:03.720 | The one thing I would observe though, Dick,

00:31:05.840 | is that, you know, you go back to, you know,

00:31:08.560 | the Great Depression, or even for that matter, the 1950s,

00:31:13.040 | only a very small percent of people invested in stocks.

00:31:15.440 | I haven't, it's been a while since I've looked

00:31:17.240 | at the Labor Department's data on this,

00:31:21.080 | but only, you know, until 30, 40 years ago,

00:31:23.720 | only about 10% of people owned stocks,

00:31:25.400 | whereas now it's much more than half

00:31:27.440 | because of defined contribution plans.

00:31:29.840 | And that, you know, there's an upward trend,

00:31:34.120 | obviously, over the past 100 years in that number,

00:31:36.840 | but there's also been some variation

00:31:39.360 | within that period of time.

00:31:41.240 | And, you know, you go back, for example, to 1980,

00:31:43.440 | only 20, 20%, 25% of people owned stocks,

00:31:47.800 | and that was a great time to buy stocks.

00:31:49.800 | - It was, I mean, the '70s turned out, you know,

00:31:52.320 | were a terrible time for the stock market.

00:31:54.160 | I mean, I remember that in 19,

00:31:56.800 | I think I first bought stocks when the Dow Jones average

00:32:00.480 | in the middle of the 1960s was around 900.

00:32:05.480 | And 17 years later, in August 1982,

00:32:10.640 | the Dow Jones average was 780.

00:32:13.360 | And in between, you know, there had been all this inflation

00:32:16.800 | that sort of averaged 6% a year,

00:32:18.720 | if you remember the great inflation

00:32:20.240 | from the late 1960s through the early 1980s.

00:32:24.360 | Inflation was 6% a year, and stocks, you know,

00:32:27.320 | the Dow average had actually gone down over that period.

00:32:29.960 | So in real terms, investors were really cream,

00:32:32.800 | but you could get, you know, that was a good time to buy.

00:32:36.720 | My wife and I were professors,

00:32:38.720 | and I knew finance theory way back in the 1960s,

00:32:42.240 | and I said, you know, we're young now,

00:32:43.720 | and so we should put all of our money into equities.

00:32:46.120 | And we did, and then in the '70s,

00:32:48.400 | my equities weren't doing very much,

00:32:50.680 | but I steadily put in the little bit of money

00:32:53.800 | that I could put in month by month.

00:32:56.080 | And my wife, she said, interest rates are very high now,

00:33:00.600 | so I'm gonna reduce, I'm gonna disagree with you

00:33:03.600 | and not put so much money into stocks,

00:33:05.840 | I'm gonna put it into interest.

00:33:07.680 | And she was sort of right for a while,

00:33:09.280 | I think her stuff grew faster than mine,

00:33:11.520 | but in the 1980s, she turned out to be wrong

00:33:14.760 | when the stock market recovered

00:33:16.840 | and the Great Bull market began.

00:33:18.560 | So it was, yeah, I mean, it was a good time to buy stocks.

00:33:24.520 | But most people at the time thought it was terrible

00:33:26.560 | because the stock market wasn't doing anything.

00:33:29.240 | That's the time to buy.

00:33:30.240 | Who was it, J. Paul Getty said,

00:33:32.680 | other people have said something like it,

00:33:34.520 | buy when everybody else is selling

00:33:36.760 | and hold on until everybody else is buying.

00:33:40.160 | - Yeah, or Buffett's famous quote,

00:33:41.680 | that to be greedy when others are fearful

00:33:43.160 | and fearful when others are greedy.

00:33:44.720 | - Yeah, yeah, right.

00:33:45.560 | - Which you mentioned though, the word inflation.

00:33:48.120 | Again, I really wanna get back

00:33:49.800 | to one of the first questions I asked you,

00:33:52.000 | which is what do you think happens

00:33:55.440 | to our increasingly dire,

00:33:58.160 | the nation's increasingly dire fiscal situation?

00:34:01.760 | Increased taxes, decreased benefits,

00:34:06.480 | or the government will inflate things away with debt.

00:34:10.720 | Which do you think of those is most likely?

00:34:14.040 | - I think right now, I would say,

00:34:16.100 | since nobody's talking about this

00:34:17.800 | at high levels of government,

00:34:19.840 | that inflating away, making the government's financials,

00:34:24.640 | the arrangements easier, inflation is ahead.

00:34:29.560 | That's what I would worry about.

00:34:31.240 | And of course, the Fed is committed to 2%.

00:34:33.880 | I could never figure out why they were committed to 2%.

00:34:36.640 | Zero seemed pretty good to me.

00:34:38.960 | The 19th century, the country did pretty well,

00:34:41.580 | and the inflation rate of the 19th century was 0%.

00:34:46.580 | But now we say 2% is okay.

00:34:49.620 | And I think the signs I would look for

00:34:52.360 | is when we, I would expect something like this

00:34:55.720 | to occur fairly soon.

00:34:56.800 | Well, we're close enough to 2%

00:34:58.960 | that we don't really have to,

00:35:00.800 | everything's fine now,

00:35:02.160 | and then it'll creep back up toward 3%.

00:35:05.440 | And they'll say, well, that's okay.

00:35:07.240 | And maybe we could live with 3%.

00:35:11.200 | I'm sort of disgusted with some of my fellow economists

00:35:14.480 | who said, we should make 3% the target now.

00:35:17.960 | I think that's kind of irresponsible economic advice.

00:35:21.040 | But if it goes up to 4% or so,

00:35:23.800 | then you're getting back to our situation in the 19,

00:35:27.800 | like we had in the 1970s,

00:35:29.760 | where it's sort of bad for the stock market.

00:35:32.240 | - Okay, here's another question for you,

00:35:37.480 | which I can't help but ask you,

00:35:40.480 | which is, you're an educator.

00:35:44.000 | And what reading, what is the essential reading

00:35:49.040 | that everyone should be doing in this room

00:35:51.880 | regarding financial history?

00:35:53.280 | If you could read one or two books, which would they be?

00:35:56.280 | - Well, one that just came out a year or so ago,

00:35:59.400 | and I think is pretty good,

00:36:01.080 | and it's by a non-academic fellow named Mark Higgins.

00:36:05.280 | It's a book called "Investing in U.S. Financial History."

00:36:10.280 | It's a fairly big book,

00:36:12.080 | and it seems to have done pretty well in its first year,

00:36:14.720 | because now they're gonna make it into an audio book.

00:36:17.040 | I mean, the book is full of charts and tables

00:36:19.080 | and things like that.

00:36:20.100 | I don't know what happens to them in an audio book,

00:36:22.400 | but Mark Higgins, "Investing in U.S. Financial History."

00:36:27.560 | And I've been teaching a sort of short course

00:36:30.520 | in financial history in retirement

00:36:34.160 | at the Fordham Business School, the Gabelli School.

00:36:39.160 | And we used the book last year,

00:36:40.600 | and the students sort of liked it.

00:36:42.040 | So you like to assign students books that they like.

00:36:46.560 | And this Mark Higgins book,

00:36:47.880 | I think he puts together a lot of 200 years,

00:36:51.280 | 230 years of U.S. financial,

00:36:53.680 | all the way through the COVID pandemic,

00:36:58.680 | and starting off with Alexander Hamilton, I suppose.

00:37:01.840 | And it's just, and he's big on people like Hedy Green,

00:37:06.360 | who was this woman investor in the 19th century.

00:37:09.600 | And a lot of people, they call her the witch of Wall Street,

00:37:12.640 | but he says Hedy Green was really smart,

00:37:15.040 | and a lot smarter than the men

00:37:16.420 | that she was dealing with back in those days.

00:37:18.600 | So that's a nice feature of the book as well.

00:37:21.560 | But yeah, I mean, I think a long-term view

00:37:24.920 | of what happens, such as we had in a few charts here,

00:37:28.840 | it's really worth having.

00:37:32.560 | We get kind of, we're too oriented toward the latest event.

00:37:37.560 | What did the Fed do last week,

00:37:39.360 | or what is it gonna do next week?

00:37:41.100 | And on Wall Street, they say history is five minutes ago.

00:37:46.100 | I think people should have a longer-term perspective.

00:37:49.720 | And I detect in this Bogleheads group

00:37:52.880 | that people do have a longer perspective.

00:37:55.200 | - Yeah, I will second Dick's recommendation

00:38:00.080 | of the Higgins book.

00:38:00.960 | It is spectacular.

00:38:02.200 | Investing in U.S. market history, right?

00:38:05.800 | - Investing in U.S. financial history.

00:38:07.960 | - Financial history, yeah, right.

00:38:08.920 | It's a spectacular-- - So it has double meaning.

00:38:11.040 | - Good book.

00:38:11.880 | One of the reasons why I read it, by the way,

00:38:13.240 | was that Dick had told me to read it.

00:38:16.380 | He had reviewed the book favorably,

00:38:17.920 | and one or two other people who I respected as well.

00:38:20.880 | And hopefully, with luck,

00:38:21.840 | we can get him at the conference next year.

00:38:24.000 | All right, well, here is a good question.

00:38:27.840 | What do we miss by focusing on market history

00:38:30.260 | primarily in the U.S.?

00:38:32.480 | Should we be considering a global historical view

00:38:34.840 | when thinking about the future?

00:38:36.880 | And I actually broached this

00:38:38.440 | with one of the other speakers last night.

00:38:42.800 | And he discounted a lot of foreign financial history

00:38:47.620 | because it was blighted by war and conflict,

00:38:50.820 | which he thinks is much less of a consideration

00:38:55.720 | in this country.

00:38:56.920 | So you look at the financial history in Austria and Italy

00:39:01.480 | and Germany and Japan, and it's awful

00:39:04.120 | because those countries were leveled in war,

00:39:06.440 | and he says that's not relevant to here.

00:39:08.540 | So what do you think about that?

00:39:10.440 | - Well, I think the U.S.,

00:39:13.360 | we talk about emerging markets,

00:39:15.840 | and China's been a great emerging market

00:39:17.600 | for the last 40 years,

00:39:18.840 | and Japan probably in the late 20th century

00:39:23.520 | was a great big emerging market.

00:39:26.320 | But our own country, the United States,

00:39:29.000 | was probably the most successful emerging market

00:39:31.400 | of the last 200 years 'cause we were an emerging market.

00:39:35.920 | And it turns out that we were

00:39:38.720 | a very successful emerging market,

00:39:40.840 | and we all had these financial markets,

00:39:44.360 | treasury bond markets, stock markets,

00:39:46.360 | going back to the beginning,

00:39:47.680 | and we also have the best records of it.

00:39:51.080 | So when the world looks at equity investment,

00:39:54.500 | they often, everybody's thinking

00:39:59.580 | about what happened in the U.S.,

00:40:01.280 | but as Bill pointed out, in most other countries,

00:40:03.920 | the experience wasn't nearly as good as that.

00:40:06.280 | And in some places, stock markets disappeared altogether.

00:40:13.320 | In the United States, there'd been a few times

00:40:15.160 | when the stock market was shut down.

00:40:16.760 | I think it was shut down for a few days in 1873

00:40:20.200 | when there was a financial panic,

00:40:22.040 | and it was shut down by government order,

00:40:26.240 | although we only found that out recently,

00:40:28.580 | from the end of July 1914 until December of 1914.

00:40:33.580 | It turns out that the Treasury Secretary

00:40:36.960 | asked the New York Stock Exchange to shut down.

00:40:40.080 | But in other countries,

00:40:40.920 | markets have disappeared altogether.

00:40:42.560 | Think if you were an investor in Russia.

00:40:44.360 | They had a big industrialization movement

00:40:46.120 | on the stock market.

00:40:47.280 | If you've been to St. Petersburg,

00:40:48.640 | there's a nice building on the waterfront there

00:40:50.560 | that was the St. Petersburg Stock Exchange,

00:40:52.920 | and maybe it is again now.

00:40:55.160 | But there was a period from 1917 through 1990

00:40:59.400 | when it was not the St. Petersburg Stock Exchange.

00:41:04.220 | So there is a bias in the way people around the world

00:41:08.160 | look at financial markets.

00:41:09.600 | A lot of what they know is U.S. financial history

00:41:12.200 | because we had a successful market

00:41:14.360 | and we had the best data.

00:41:16.300 | But still, since half the world's market cap

00:41:23.040 | is, roughly speaking, half the world market cap

00:41:25.360 | is the United States, it's not so bad.

00:41:30.120 | The world knows that we had a good record

00:41:33.920 | and they invest here.

00:41:35.020 | - Do you worry at all about,

00:41:37.800 | and this is talking about global stock markets in particular,

00:41:41.000 | about declining birth rates,

00:41:43.300 | particularly in developed nations?

00:41:46.600 | I mean, I think that the fertility rate in Korea is 0.8.

00:41:51.260 | You need 2.1 for replacement.

00:41:54.800 | Japan is almost as bad.

00:41:56.500 | - Yeah, well, there were people in the past

00:41:58.960 | that worried about too many people in the world.

00:42:00.480 | Remember, there were people saying

00:42:01.800 | we're all gonna starve to death

00:42:02.640 | because there's too many people in the world.

00:42:05.040 | But now they're talking the opposite way,

00:42:06.640 | that the world population is gonna start shrinking.

00:42:11.180 | Actually, economic historians, I'm one of them,

00:42:13.980 | we've done a lot of study of, not myself,

00:42:17.100 | but other people have done,

00:42:18.620 | it's called the demographic transition.

00:42:21.060 | And usually in a pre-modern world

00:42:23.180 | based largely on agriculture, birth rates are high.

00:42:26.480 | And then as countries modernize and become more diversified,

00:42:31.420 | commercial, industrial, post-industrial,

00:42:34.620 | birth rates come down.

00:42:36.080 | And there's been a lot of speculation why that happens.

00:42:38.700 | But I think now, most of the world

00:42:41.900 | is commercializing and industrializing.

00:42:44.500 | And so the birth rates are coming down.

00:42:47.620 | And it may be that we're not too far

00:42:50.540 | from peak world population.

00:42:52.660 | And after 2050, it may start shrinking.

00:42:55.780 | And I think in places in the world

00:42:59.460 | where population has gone down, certain countries,

00:43:01.800 | like Italy for the last 20 or 30 years

00:43:04.860 | has had a declining population, I think.

00:43:07.700 | And their economy hasn't been doing very well.

00:43:09.900 | So we're gonna have to figure out

00:43:11.980 | what we need to do in the economy

00:43:13.940 | with the fewer people every year.

00:43:16.600 | And that usually means that more and more of the people

00:43:18.840 | are old and there are fewer young people.

00:43:20.540 | So that has implications for the social safety net.

00:43:23.780 | Young people pay into Social Security

00:43:25.680 | so that guys like Bill and me can get our monthly check.

00:43:28.540 | And what happens when there are very few young people

00:43:31.860 | and a bunch of old guys like Bill and me?

00:43:34.060 | - Yeah, I mean, you know, whenever I see a younger person

00:43:38.860 | who is trying to save for retirement,

00:43:41.420 | especially if they've got an enormous amount of student debt,

00:43:43.460 | I apologize to them for stealing their future,

00:43:46.700 | which is what we boomers did and people older than boomers,

00:43:51.460 | like Dick did, is we really did a job on Generation Z

00:43:56.460 | and even Generation X for that matter.

00:43:59.340 | - You used to say there were bumper stickers in Florida

00:44:02.380 | that said spending the kid's inheritance.

00:44:06.180 | - Yeah, I mean, my med school tuition,

00:44:08.620 | I'm fond of telling people, was $1,550 a year.

00:44:11.660 | All right, even adjusted for inflation,

00:44:16.260 | it was still pretty ridiculously low.

00:44:18.400 | Reserve currency status, okay?

00:44:22.260 | Do you worry about the U.S. losing

00:44:25.740 | its reserve currency status

00:44:27.140 | and what investment implications do you think that has

00:44:30.860 | for individual investors?

00:44:34.580 | - Well, there's no doubt that the U.S. gains a lot

00:44:37.220 | by being the world's reserve currency.

00:44:40.300 | I mean, if you think about it for a few cents,

00:44:44.180 | the government can run off a $100 bill

00:44:47.360 | and then it can buy $100 worth of goods

00:44:50.100 | in the United States or it can buy $100 worth of goods

00:44:54.340 | in foreign countries.

00:44:56.180 | So that's, we call it, the technical term is seniorage.

00:45:01.160 | The U.S. gets a lot of seniorage

00:45:03.020 | from being able to print a $100 bill for a few cents

00:45:06.440 | and get $100 worth of goods for it.

00:45:09.340 | So that is a great advantage of the United States.

00:45:12.640 | It's worth trying to protect it, I guess,

00:45:17.060 | and there are challengers.

00:45:18.700 | China, I mean, I had some folks from China

00:45:20.980 | come into my office at NYU once and say,

00:45:24.220 | we want to build up our currency

00:45:25.860 | to be a sort of reserve currency.

00:45:28.120 | And how can we do it?

00:45:29.580 | And I said, well, the first thing is

00:45:30.740 | you have to let people take money in and out of your country.

00:45:33.140 | You can't regulate capital flows as much as you do.

00:45:38.140 | But they're working on that now.

00:45:42.340 | And people thought the euro would be a good rival,

00:45:45.220 | but the euro has its own problems.

00:45:47.240 | But it is worth keeping the currency.

00:45:50.900 | And remember, it's being threatened partly by things

00:45:53.260 | like the sanctions we put on Russia,

00:45:56.460 | seizing some of their assets and that

00:45:58.420 | after the invasion of Ukraine.

00:46:01.980 | So I think you have to have a sort of set of,

00:46:06.980 | people won't trust you.

00:46:08.820 | I mean, I think that we've actually lost

00:46:10.980 | some of that trust just in the last few years

00:46:12.860 | by some of the things we've done to,

00:46:14.500 | some call it the weaponization of the dollar.

00:46:17.220 | We're gonna make it hard for you to deal in dollars.

00:46:19.820 | And if people will look at that, they say,

00:46:22.140 | well, we better think twice about holding dollars

00:46:25.700 | as a reserve currency.

00:46:27.300 | And it's well known now that many countries in the world

00:46:30.260 | that held gold reserves in the United States

00:46:34.020 | and had a lot of dollar assets,

00:46:35.740 | they've been taking their gold home from the United States.

00:46:38.720 | I think the Germans loaded up a lot of their gold

00:46:41.020 | in the Federal Reserve Bank in New York and took it home.

00:46:43.700 | 'Cause that's where the gold vault

00:46:45.580 | of the Federal Reserve Bank in New York

00:46:47.020 | has a bunch of gold in it.

00:46:49.220 | It's a good tourist stop if you can get in there.

00:46:52.100 | And they used to say a financial crisis,

00:46:53.860 | the actual real world equivalent of a financial crisis

00:46:57.500 | was some guy in the vault

00:46:59.180 | in the Federal Reserve Bank in New York

00:47:00.860 | would take some gold bars from one country's vault

00:47:03.700 | and put them in another country's vault.

00:47:06.080 | That's what a financial crisis was.

00:47:08.060 | - Well, one final question,

00:47:11.620 | which is if index fund investing has revolutionized

00:47:15.660 | the last 30 to 40 years,

00:47:18.720 | what technological advances do you see

00:47:23.620 | coming down the pike?

00:47:25.900 | Or are you of the school of thought

00:47:28.660 | that says it's impossible to forecast technology?

00:47:33.500 | - Well, I don't know about technology.

00:47:35.380 | It's hard to forecast technology,

00:47:38.180 | but it's very important to have some idea where it's going.

00:47:41.220 | If we're now stuck in a 2% real growth world,

00:47:44.780 | it's because technological change

00:47:46.580 | is not as fast as it was in the past.

00:47:49.280 | College classmate of mine, Robert Gordon,

00:47:53.100 | wrote a book a few years ago,

00:47:54.340 | The Rise and Fall of U.S. Growth.

00:47:56.920 | And he basically said the great inventions

00:47:59.500 | were the indoor plumbing and things like that.

00:48:02.820 | He used to love to hold up his iPhone and say,

00:48:06.140 | "If you had a choice between indoor plumbing

00:48:08.580 | "and this iPhone, which would you choose?"

00:48:12.660 | (laughing)

00:48:15.260 | Most people would say, "Indoor plumbing

00:48:17.140 | "was maybe a little more important to us

00:48:18.860 | "than having an iPhone."

00:48:20.280 | So anyway, if we are to grow faster again,

00:48:26.020 | and people think we ought to grow at 3%

00:48:27.740 | or something like that,

00:48:28.660 | it'll be dependent on technology and technological advance.

00:48:33.660 | So there'll be a lot of improvements.

00:48:36.420 | I think, I don't know if it's just technology,

00:48:39.600 | but I think now, at certain points in my life,

00:48:42.540 | I said, "Well, should I get involved

00:48:43.860 | "in commodity investments?

00:48:45.480 | "Or should I just kind of stick to the stock market

00:48:49.340 | "and the bond markets, fixed income markets?"

00:48:53.260 | And I once dabbled in commodities.

00:48:56.460 | I didn't have any great success or any great failures,

00:48:59.020 | but I just decided it required too much work

00:49:01.120 | to keep up with that.

00:49:02.040 | What I've noticed now is I have silver in my portfolio

00:49:05.940 | because I can buy SLV.

00:49:08.980 | That's a silver, apparently, if I give 'em $1,000,

00:49:12.700 | they buy $1,000 of silver, but it's a tradable security.

00:49:16.220 | Or GLD, gold is another one.

00:49:18.500 | So the markets have improved to the point

00:49:20.460 | where you can become a commodity investor

00:49:23.340 | without really dealing with the Chicago commodity exchanges.

00:49:27.420 | And I see that, the financial world is becoming

00:49:31.160 | much more sophisticated and opening up new opportunities

00:49:35.660 | to people, easy investment in commodities.

00:49:39.540 | And I noticed my silver's up 30% this year,

00:49:43.540 | so not bad.

00:49:46.400 | If I say everybody should have a little bit of tips

00:49:51.020 | in their portfolio, I might also say

00:49:53.900 | that maybe everybody should have a little bit

00:49:55.660 | of silver or gold, and it's very easy to do that now,

00:49:58.580 | much easier than in the past.

00:50:00.220 | - Yeah, that's one way to do it.

00:50:02.180 | And silver, SLV, and GLD are two things

00:50:05.420 | that you can buy that you can actually benefit

00:50:08.140 | from the spot price.

00:50:09.540 | Otherwise, when you're dealing,

00:50:11.820 | unless you can store a large amount of grain and oil

00:50:14.820 | in your backyard, you can't own the spot price.

00:50:18.180 | You have to deal with futures,

00:50:19.100 | and the problem with dealing with futures

00:50:20.980 | is that if too many people chase them,

00:50:23.580 | you wind up in something called--

00:50:24.900 | - Right, the great worry, they used to say

00:50:26.660 | the great worry of a commodity investor

00:50:28.580 | is that someday a railroad car will come up to their house

00:50:33.580 | and unload 50,000 pounds of pork bellies.

00:50:36.880 | (laughing)

00:50:38.260 | - Okay, well, I think we'll call it a day.

00:50:42.300 | - Okay.

00:50:43.140 | you

00:50:45.200 | [BLANK_AUDIO]

Bogleheads® Conference 2024 Financial Historian Richard Sylla in Conversation w/ William Bernstein

Chapters