Bogleheads® Speaker Series – Joseph Davis & Maria Bruno

00:00:00.000 | Hi, my name is Rick Ferry and I'm the president of the John C. Bogle Center for Financial

00:00:07.080 | Literacy, a 501(c)(3) nonprofit organization that was created in 2012 by the founders of

00:00:14.400 | the Bogleheads organization with the assistance of Jack Bogle.

00:00:18.600 | The center's mission is to further financial education worldwide, promote low fees and

00:00:25.040 | financial well-being and to foster a sense of community amongst our all-volunteer membership.

00:00:31.500 | And of course, your tax-deductible donation to the boglecenter.net is greatly appreciated.

00:00:37.800 | The idea for this online conference came about because of COVID-19.

00:00:42.220 | As many of you know, we normally do an annual conference outside of Philadelphia, but unfortunately

00:00:49.160 | we have not been able to do that in the last couple of years.

00:00:52.960 | For your planning purposes, we plan to have a large conference in 2022.

00:00:59.200 | The location has yet to be identified, but please mark your calendars for the fall of

00:01:04.240 | 2022 for our first large and expanded Bogleheads conference.

00:01:09.400 | In the meantime, we have the speaker series.

00:01:14.040 | And I wish to thank a lot of the Boglehead members who have helped put this together,

00:01:19.440 | particularly Mike Nolan of Vanguard, who has tirelessly spent a lot of time with his committee

00:01:26.240 | putting together this event, and will also be working on the big event in 2022.

00:01:33.880 | Today we're happy to have our guests from Vanguard, Joe Davis and Maria Bruno.

00:01:40.340 | Joe is the global chief economist and global head of Vanguard Investment Strategy Group.

00:01:45.600 | And Maria is the head of the U.S. Wealth Planning Research Group at Vanguard.

00:01:49.440 | Joe and Maria will discuss the 2021 Vanguard Economic and Market Outlook and Vanguard's

00:01:56.960 | views on global growth, inflation, the financial markets, and the implications for your portfolio.

00:02:03.760 | We wish to thank all of you who submitted questions for Joe and Maria.

00:02:09.780 | We hope you enjoy this presentation and tell others about it.

00:02:13.120 | Today's event is being recorded.

00:02:15.440 | In a few days it will be available on boglecenter.net.

00:02:19.080 | And we will make a post on the bogleheads.org forum that it is available for viewing.

00:02:25.360 | Thanks again for joining us.

00:02:27.080 | And over to you, Maria.

00:02:29.760 | Thank you, Rick.

00:02:30.760 | It's good to be here today.

00:02:31.760 | It's unfortunate we weren't able to be together in person in our fall conference, but it's

00:02:35.720 | tremendous how we're able to do this virtually.

00:02:37.760 | So kudos to the team for putting all this together.

00:02:41.160 | So Joe, we're here together.

00:02:43.360 | As I was thinking, we've been working together on and off for about 15 years now.

00:02:47.320 | And this is the very first time the two of us have actually shared the stage together.

00:02:51.680 | It's a virtual stage, but nevertheless, the first time we're together.

00:02:55.120 | So I'm looking forward to it.

00:02:56.600 | And no better audience to do this with than our bogleheads.

00:03:01.720 | So with that in mind, I think it's only right for us to talk a little bit about Mr. Bogle.

00:03:06.680 | So you and I both had the opportunity to work with him and know Mr. Bogle.

00:03:10.480 | Tell us a little bit how he influenced you and your approach to investing.

00:03:13.840 | Sure, Maria.

00:03:14.840 | And again, thanks, everyone, to the bogleheads for making time.

00:03:18.080 | I hope this finds you healthy, you and your loved ones.

00:03:22.280 | And again, Maria, I can't believe it's 15 years we've never done this before.

00:03:26.200 | Shame on us.

00:03:27.200 | For those in the audience, Maria and I go way back.

00:03:30.520 | I've known Maria since I've started here at Vanguard.

00:03:34.760 | And someone who touched me ever since day one at Vanguard was Jack Bogle.

00:03:39.080 | I do miss him considerably.

00:03:41.720 | I used to have the pleasure and the honor of having lunch with Jack probably about once

00:03:49.240 | every two or three months.

00:03:52.720 | We used to get together for lunch in the galley, which is our cafeteria.

00:03:55.680 | We call it the galley at Vanguard.

00:03:57.680 | And I always recall him having a little cup of soup, whether it's minestrone or chicken

00:04:03.680 | noodle or whatever.

00:04:04.680 | And we would-- there's two things I take back from those conversations.

00:04:09.200 | One-- well, actually, three, Maria.

00:04:11.240 | One was that tremendous leader known in the industry, obviously leading Vanguard, yet

00:04:17.480 | he always found time to talk with individuals.

00:04:20.480 | He was, in that sense, selfless with his time.

00:04:22.560 | So that was a wonderful attribute, number one.

00:04:26.520 | Second, what I always enjoyed talking about Jack was-- and was always impressed with his

00:04:33.040 | work-- he read widely.

00:04:35.120 | And so I was always a student of history, but he certainly knew more history than I

00:04:39.240 | did.

00:04:40.240 | And so I think we hit it off in part because of that appreciation for history-- from naval

00:04:45.440 | warfare to early business cycles in the United States.

00:04:50.080 | So he was widely read, and I think that he was a tremendous asset for Jack, because you

00:04:55.440 | would see that he would draw upon that in his speeches.

00:04:57.800 | He was one of the few individuals I've ever met in the world who could talk about Shakespeare

00:05:03.520 | and financial theory within the same conversation.

00:05:05.720 | And in fact, he would make it actually very relevant.

00:05:08.520 | So he would span those different disciplines, and it's something that I always admire.

00:05:11.880 | And I always tell that to my colleagues at Vanguard, to sort of aspire to.

00:05:17.760 | And then the third something-- more I watched from a distance when Jack was on stage, but

00:05:22.880 | you would see it in his readings and so forth.

00:05:25.120 | But he did give me this coaching once, and that is that he said, when you do the strong

00:05:31.240 | research and you have a finding, particularly that's in the aid and support of investors,

00:05:36.880 | he says, do not be afraid to show conviction in that idea.

00:05:40.760 | And so you would see that clearly from Jack.

00:05:43.200 | It led the industry for low-cost investing in terms of our investment philosophy.

00:05:47.920 | He would not apologize.

00:05:48.920 | It's the song he would come across in the industry as strident.

00:05:53.520 | But I always-- and that's a great-- that was-- he demonstrated leadership.

00:05:56.680 | He would not bend in his conviction of his ideas, particularly when they were well-grounded

00:06:01.680 | as they always were, and well-researched.

00:06:04.960 | So those were the three things, Marie, I took back from Jack, continue to think about him

00:06:10.840 | on occasion.

00:06:11.840 | And again, when I pass through the statue-- I'm on campus today-- when I pass through

00:06:15.360 | Jack's statue, those images come back to me with regularity.

00:06:21.560 | I'm near spot on.

00:06:24.040 | I think the one thing I would add, too, is just really the focus on our clients.

00:06:27.200 | And we're clients, right?

00:06:28.200 | We're shareholders as well.

00:06:29.840 | And being a research team and doing the work that we do, unless we have key takeaways in

00:06:33.680 | how do you make it actionable, there's very little relevance to what we do, right?

00:06:38.000 | So how do we take our learnings and how do we apply these to help investors improve their

00:06:43.760 | financial outcomes, improve their chance for investment success?

00:06:46.780 | So I continue to take that through the years.

00:06:51.360 | Marie, we both, right?

00:06:52.360 | I mean, he's been an aspiration for both of us.

00:06:54.120 | I love what you just said.

00:06:55.400 | I mean, it's like rigorous work, rigorous but relevant research, right?

00:06:58.840 | Because it's got to be practical and applicable.

00:07:01.200 | If not, I mean, it's nice, but why should the shareholder help support the work that

00:07:09.040 | you and I do?

00:07:10.040 | That was always Jack's more star and something I've always aspired to be and to follow.

00:07:15.040 | But he set a very strong path for all of us.

00:07:20.200 | And you and I both, as part of the research at Vanguard, in many ways, we're trying to

00:07:25.560 | carry his legacy in our small way.

00:07:30.360 | So he continues to serve as inspiration for us and for our crew.

00:07:34.760 | Yes.

00:07:35.760 | So I think that segues really well into how we're going to spend the next hour or so,

00:07:40.840 | Joe.

00:07:41.840 | So let's talk about our economic outlook and what does Vanguard expect and then how do

00:07:47.840 | we take this and apply that into our own portfolios and key messages for investors.

00:07:52.440 | So let's start first with, so Vanguard published our 2021 economic outlook and we think about

00:07:58.960 | the framework that we have for our near term prospects.

00:08:01.240 | But if we look at the recovery, highly contingent upon health outcomes and also consumer reluctance.

00:08:07.520 | So let's talk a little bit about that in terms of where we're heading as we're starting the

00:08:11.240 | year and as what we might expect throughout the year.

00:08:14.800 | Sure, Maria.

00:08:15.800 | You know, so as soon, you know, going back through even replaying these, you know, very

00:08:21.280 | challenging and traumatic events, you know, ever since the beginning of 2020, I'm very

00:08:27.960 | proud of the team.

00:08:28.960 | You know, we very quickly realized how significant, didn't know exactly how the events of 2020

00:08:34.640 | and even today would continue to unfold, but I'm proud of the team of really focusing on

00:08:39.440 | the framework that a healthy economy or an impaired economy would begin and end health.

00:08:44.400 | And so we very quickly, first time in my career, I had to very seriously think about health

00:08:50.440 | outcomes driving the economy in such around the world.

00:08:55.640 | And so what we did is, you know, we applied, you know, the sort of, you know, what the

00:09:00.320 | sort of the concerns around health, fear of catching the disease, the supply impacts,

00:09:05.240 | the inability to either go to school or to conduct business.

00:09:09.600 | And we and we applied a lot of data through that framework, say which sectors are going

00:09:14.920 | to be highly impaired because of social activity, so-called face-to-face activity.

00:09:20.320 | And that framework continues to serve us well.

00:09:22.120 | I mean, that told us that the global economy would suffer the deepest recession in world

00:09:27.280 | history.

00:09:28.280 | It would be short in the sense of it would fall very profoundly, it would start to grow

00:09:34.040 | and that the pace of recovery would largely be dictated by the path of the virus.

00:09:38.080 | And that has generally held out to be the case.

00:09:40.480 | It gave us, I think, a great deal of accuracy, or at least as best you can have given the

00:09:45.800 | uncertainties of the virus.

00:09:47.120 | So where do we stand today?

00:09:49.360 | It's an environment where, you know, we look at the percentage of the world that has yet

00:09:53.480 | to achieve immunity to the virus, which is considerable.

00:09:56.960 | And that once you can have an estimate of the immunity gap and how quickly that achieves

00:10:03.760 | herd immunity, so-called 70% or 80% of the world that becomes immune to the virus, the

00:10:09.440 | COVID-19, that will then dictate the pace of the recovery, particularly with respect

00:10:13.360 | to social-based activities.

00:10:14.560 | So think about restaurants, hotels, travel, which has been, has suffered the vast majority

00:10:21.240 | of the slowdown, whether you're looking at China, Europe, or the United States.

00:10:25.880 | And so when we look at that, you know, we look at our immunity gap as a factor of two

00:10:31.120 | variables.

00:10:32.120 | One is how, how, how, how effective is any vaccine?

00:10:37.300 | We've long thought a vaccine would likely be developed, but that was certainly as much

00:10:43.340 | of our hope as our forecast.

00:10:45.640 | And secondly, you know, what, what surprised us positively several months ago was that

00:10:50.320 | the efficacy of the vaccine, at least some of the two that are already approved for emergency

00:10:55.640 | use are well above the 60% threshold, which is deemed baseline.

00:10:59.440 | In fact, it was well above even childhood efficacy rates.

00:11:03.320 | So it's roughly over, roughly 90%, somewhat higher.

00:11:07.200 | That plus the percentage of the population that actually takes the vaccine, you, you

00:11:10.680 | combine those two percentages, and then you get a timeline of when we will quote unquote

00:11:15.880 | get back to what normal or at least more normal activity.

00:11:21.600 | And so that, when we apply that framework, it looks like certainly by the end of 2021,

00:11:28.240 | the largest economies in the world, the United States, China, Europe, will have achieved

00:11:34.120 | what's so-called herd immunity, which means such a large percentage of the society has

00:11:40.200 | effectively become immune that the spread of disease is much less rapid and it starts

00:11:47.040 | to dissipate.

00:11:48.040 | And so that continues to be our framework.

00:11:50.920 | It means that growth for 2021, our theme was approaching the dawn.

00:11:56.040 | We're not quite there yet.

00:11:57.400 | There's going to be some unsettling next few weeks.

00:12:01.020 | We expected actually a retraction activity.

00:12:03.320 | I think we saw for the jobs report, the past, you know, Friday, we started to see lost jobs,

00:12:09.840 | some restaurants had to close.

00:12:11.680 | But as we proceed through 2021, that we will see an acceleration activity.

00:12:17.360 | Part of that is getting just recovering the losses from 2020.

00:12:21.900 | But certainly 2021 should be a stronger year for the economy.

00:12:26.160 | And that was even before additional fiscal stimulus, which will be enacted.

00:12:30.600 | But it's a positive economic outlook, but still that also has to, I underscore that,

00:12:37.440 | you know, we continue, just our hearts are out to those that continue to be, you know,

00:12:43.080 | affected by this virus, both from the health side, as well as for those that operate businesses,

00:12:49.600 | which, you know, they're still struggling right now because there's still a decent amount

00:12:53.680 | of pain out there in certain sectors.

00:12:56.120 | Okay.

00:12:57.120 | Joe, you had mentioned acceleration.

00:13:00.040 | Let's talk a little bit about trends.

00:13:01.600 | So you and your team have talked a lot throughout the pandemic about certain trends that we've

00:13:05.520 | seen accelerated, but then equally are important are trends that we've seen that haven't been

00:13:10.560 | impacted that we maybe would have expected from the pandemic.

00:13:14.120 | Can we talk a little bit about that in terms of what we might have seen and what we might

00:13:17.640 | expect to see?

00:13:18.640 | Sure.

00:13:19.640 | I mean, you know, I think we can bucket into three, we have three broad buckets in terms

00:13:25.840 | of how the world may have been affected or we think will be affected by COVID-19.

00:13:29.920 | Again, I think it's to underscore, I know COVID-19 has impacted me profoundly on a personal

00:13:35.880 | level, you know, and I would imagine others as well on the call today.

00:13:43.480 | You know, I think our study of history, as well as our own personal experience, this

00:13:46.640 | has been a traumatic global experience that is shared by billions around the world, but

00:13:50.520 | I think it is reasonable to expect some changes.

00:13:53.760 | I think one bucket of changes are trends that were already on their way that have been accelerated.

00:13:59.520 | So the move, and much of this has been discussed by others in the media and so forth, things

00:14:04.240 | that we research as well, you know, the move to the increased digitization of the economy,

00:14:09.380 | you know, whether it's media, financial services, others, that was already well on their way.

00:14:14.400 | That's only accelerated.

00:14:15.400 | We've seen this in the retail sector.

00:14:17.560 | Again, I think what, you know, the future has been, you know, fast forwarded to some

00:14:22.160 | extent.

00:14:23.160 | And so I think a five years worth of some call it disruption, others call it acceleration

00:14:29.240 | of certain business models, you know, that's been compressed into roughly a year's time.

00:14:34.240 | But that trend was on their way already and it's something we've researched.

00:14:38.360 | I think, you know, one thing that I think, you know, we did a lot of work on the future

00:14:44.120 | of automation and what that may or may not mean to the labor market.

00:14:47.960 | The one thing that at least I didn't worry about in the past was the location of that

00:14:51.240 | work.

00:14:52.240 | But looking at that framework, I think another bucket, something that, again, I think part,

00:14:56.320 | you could argue was a trend that was going to occur anyway, but this is clearly been

00:15:01.040 | a step function.

00:15:02.040 | That is the move towards a virtual work, as best we can estimate using all the data and

00:15:07.760 | our sense of the type of tasks that can be conducted remotely versus still the need for

00:15:12.960 | face-to-face interaction, Maria.

00:15:14.920 | We this best I ask, we estimate roughly 15% of the occupations or the jobs in the United

00:15:20.640 | States, for example, will be are just as effective on a permanent basis, are just as effective

00:15:26.480 | being conducted remotely as they are in a, let me say, an office, but it's not all jobs

00:15:33.080 | are conducted in office.

00:15:34.200 | Now, that may not seem like a lot, but that's equivalent to the number of jobs in the ten

00:15:39.200 | largest cities in the United States.

00:15:41.140 | So there's going to be real estate implications for that.

00:15:44.360 | You know, I think there are some things in some of the largest cities, or there'll be

00:15:48.000 | some, there'll be some disruption there, without doubt, in commercial real estate.

00:15:53.760 | And then I think there's other trends that I think were, you know, I think in one sense,

00:15:57.920 | they weren't, I don't think they were completely changed or unaltered by the current crisis.

00:16:04.560 | One that clearly has, however, I think is the likelihood that we are going to see conditional

00:16:12.800 | stimulus.

00:16:13.800 | There was a reluctance, I think, in some economies to provide additional fiscal stimulus.

00:16:20.720 | Clearly we saw central banks very aggressive, taking interest rates to zero, even in some

00:16:27.280 | countries negative, which they remain to this day.

00:16:30.920 | I think that has been a pivot from the past 20 or 30 years, and I don't think it'll stop.

00:16:36.760 | That has some implications for the bond market, potentially for inflation, which I think we

00:16:41.040 | could get to.

00:16:42.040 | And then finally, some things that I think have been unaltered, believe it or not, with

00:16:46.520 | COVID-19.

00:16:47.520 | I think some trends with respect to innovation and productivity.

00:16:51.520 | I think we were going to see this sort of innovation, whether we were working virtually

00:16:55.440 | or in person.

00:16:57.440 | And I think we could touch upon that with the vaccine, because I think that ties to

00:17:00.640 | the vaccine discovery.

00:17:02.000 | And then I think some of the tensions, quite frankly, between the United States and China.

00:17:05.480 | I think we were going to see continued tensions between two of the largest economies in the

00:17:10.600 | world with or without COVID-19.

00:17:12.200 | So I have not seen anything that will decelerate, I think, some of those tensions.

00:17:16.640 | And so I think that's something that we'll have to continue to monitor in the years ahead.

00:17:21.440 | So I think there's been, again, acceleration in some trends.

00:17:24.320 | Secondly, pivots.

00:17:25.320 | Fiscal is particularly a pivot.

00:17:29.400 | And then finally, something I think would be unaltered, and that would be, you know,

00:17:33.920 | like COVID, you know, the China tensions, globalization is related to that as well.

00:17:40.720 | And then things around innovation, what we call the idea of multiparty.

00:17:44.440 | Okay, good.

00:17:45.440 | All right.

00:17:46.440 | I do want to move over to monetary and fiscal, Joe, because I think that lends nicely into

00:17:50.200 | that.

00:17:51.200 | Although we got right into it, and I forgot to do my job as a moderator to stress that

00:17:55.480 | we are taking questions.

00:17:57.280 | So we've got a few questions prior to the event.

00:18:01.360 | So we'll weave those in, Joe.

00:18:03.680 | But for those that are listening live, if you do have questions or want us to, you know,

00:18:09.240 | expand on anything, just let us know.

00:18:10.240 | Michael is at the helm there going through questions, and he'll be able to share any

00:18:14.440 | questions that we might be able to take live as well.

00:18:16.540 | So please don't hesitate if you do.

00:18:19.320 | So Joe, as we think about monetary and fiscal policies, right, we've seen a lot of stimulus

00:18:25.360 | activity.

00:18:26.360 | You know, how much will it continue, what will be required to continue the road to recovery

00:18:33.520 | in your thoughts?

00:18:34.520 | Well, I mean, I think, you know, policy by and large, Maria, will continue to remain

00:18:40.660 | very accommodative.

00:18:41.660 | I mean, again, and you take a step back, we have some of this in our annual outlook, as

00:18:46.720 | you mentioned and referred to.

00:18:50.080 | The combination of fiscal, monetary as well, but fiscal monetary support that we saw in

00:18:56.160 | many economies, the US in particular, in 2020, in part to address COVID, was among the most

00:19:03.640 | significant we have seen probably since World War Two.

00:19:06.320 | You know, the CARES Act, which was well over $2 trillion, pieces of legislation which we

00:19:13.160 | even at Vanguard, I spent a lot of time, even before some of those were enacted, just to

00:19:18.400 | give our thoughts from a macro perspective, in a bipartisan way, that was significant

00:19:24.720 | policy response.

00:19:27.040 | And there are still areas that need to address, I think, the $900 billion of additional fiscal

00:19:33.280 | support, particularly for those that are unemployed, in part because of inability to work, particularly

00:19:40.040 | the restaurants and face-to-face intensive sectors, that that will be helpful.

00:19:44.120 | They tend to skew lower income, which is really unfortunate.

00:19:48.520 | I think going forward, I think we will very likely see increased tendency for fiscal spending,

00:19:54.480 | and that may concern some, given our debt levels.

00:19:56.840 | I think, and we can talk more about that, I think, you know, fiscal policy should be

00:20:01.080 | split into two components.

00:20:02.680 | One is, you know, really addressing the near-term economic weakness.

00:20:08.160 | And I think there's still some impairment.

00:20:10.440 | If our forecast is right, the need for those measures will dissipate as we proceed through

00:20:16.080 | the course of this year.

00:20:17.160 | I think monetary policy, regardless, will remain, interest rates, short-term interest

00:20:22.160 | rates by the Federal Reserve will remain near zero for the foreseeable future.

00:20:26.000 | I think the earliest they would raise rates is the year 2023, a little bit earlier than

00:20:30.640 | the bond market expects, but not materially different.

00:20:35.360 | Inflation is the wild card there.

00:20:36.440 | And then, you know, the other component of fiscal, which is, I really relate to longer-term

00:20:40.320 | spending initiatives.

00:20:41.320 | Now, many will focus on Social Security and Medicare and Medicaid.

00:20:44.920 | I think the one area that, regardless of your political leaning, I think you can make a

00:20:50.480 | very strong case, and I would make a very strong case for, is infrastructure.

00:20:54.520 | There is the need for certain infrastructure spending, certainly in the United States,

00:20:59.920 | particularly if you travel by plane, train, or automobile, you know, the infrastructure

00:21:05.560 | needs.

00:21:06.560 | So, I think we will see some of that in the coming year.

00:21:09.960 | And I think part of that could help, but that will be a, so I think we will, you know, we

00:21:15.120 | will see, you know, additional fiscal stimulus at some point.

00:21:19.360 | I think the bond market will start to apply a little bit greater pressure through a little

00:21:24.040 | bit higher interest rates.

00:21:25.040 | I think that process is just starting.

00:21:27.040 | And, again, I am not saying we're going to see a material rise in interest rates, but

00:21:32.720 | they are slightly higher than what they are currently today.

00:21:35.160 | I mean, there, you know, the 10-year Treasury, which is a benchmark interest rate, 10-year

00:21:39.040 | Treasury, the yield on the 10-year Treasury is roughly 1%.

00:21:42.080 | I mean, it was 2% before COVID-19.

00:21:45.560 | So I think, you know, we will march over the course of 2021, maybe not quite get there,

00:21:52.040 | but perhaps close to it.

00:21:55.120 | And I think, hopefully, it does so in an orderly way.

00:21:59.920 | If it was unorderly, I think the Federal Reserve, I think, actually would step into the markets

00:22:05.120 | and actually purchase some Treasury bonds, because that would be counterintuitive.

00:22:08.560 | The market dislocations, it would be counterintuitive to be counterproductive to their objectives

00:22:13.600 | to kind of stabilize the rise in interest rates.

00:22:17.360 | But as a bond investor, you know, longer term, I'm hopeful for somewhat higher interest rates.

00:22:22.560 | I mean, interest rates are negative after the rate of inflation.

00:22:26.480 | So I just hope that that rise is gradual and orderly and not unorderly.

00:22:30.680 | Yeah, Joe, and I do want to talk about that a little bit more as we get into the market

00:22:36.240 | outlook, because as on the financial planning side, those are lots of the questions I get

00:22:40.200 | in terms of what do we think we're looking at in terms of market returns, but also yields

00:22:46.320 | and what does that mean for, you know, savers and spenders alike?

00:22:49.600 | Okay, you had mentioned inflation earlier.

00:22:52.800 | Is that even a very real risk for us right now?

00:22:56.200 | Right.

00:22:57.200 | So if you think about who's with us today, many Bogleheads have seen different cycles.

00:23:01.160 | Inflation under the Volcker era, where we've seen record high, you know, inflation rates

00:23:05.520 | and what, you know, in modern history, in modern times.

00:23:08.600 | But now we're seeing, you know, very low inflation.

00:23:11.440 | And there's other concerns that go along with that.

00:23:13.200 | How real is the risk of inflation or what do we need to think about inflation in the

00:23:17.680 | context of of our portfolios?

00:23:20.000 | Yeah, it's a great question.

00:23:21.800 | I mean, that's the one part, you know, as an investor, it's one of the risks you always

00:23:26.160 | always have on one's radar screen, right?

00:23:27.680 | I mean, anyone who particularly remembers their calls in 1970, even for two or three

00:23:31.680 | years of rapid rise in inflation can be near term, you know, some pain on a balanced portfolio.

00:23:37.120 | So we all should take it seriously.

00:23:39.520 | I would say, you know, three things with respect to inflation.

00:23:42.360 | One is just historical context.

00:23:44.440 | Inflation, believe it or not, is still fairly low.

00:23:46.640 | It doesn't feel like that when I go to the grocery store, it feels like everything is

00:23:49.680 | up like two X. But but in a broad basket of consumer prices, inflation is actually it's

00:23:56.480 | only roughly one, one and a half percent.

00:23:58.640 | It's below where most central banks want it to be.

00:24:00.960 | That's one.

00:24:01.960 | So it's and it's that has been generally the case for the past 20 years.

00:24:05.400 | That's actually been a problem.

00:24:07.680 | Central banks have.

00:24:08.680 | And that was actually our hypothesis, Maria, right, that central banks would and and the

00:24:12.960 | economy in the digital world would struggle to generate consistently 2 percent inflation.

00:24:18.120 | That's one of the primary reasons why interest rates are as low as they are.

00:24:21.840 | Not the only one, but it's one of the reasons that's one it's been actually lower, somewhat

00:24:26.280 | lower than what quote unquote is ideal.

00:24:29.100 | If you want to use the word.

00:24:31.160 | Secondly, is the forecast on a cyclical basis, it is very likely that we will see a rise

00:24:35.200 | in inflation.

00:24:36.200 | Part of that is is is just anticipated recovery in the economy.

00:24:40.000 | Part of that is a little bit healthy.

00:24:41.440 | I mean, we will see a recovery and in the service sector if our forecast is right.

00:24:46.360 | And that means a little bit affirming and, you know, things for air travel, hotels and

00:24:52.160 | some social activity will return.

00:24:54.280 | Right.

00:24:55.280 | There'll be some long term impairments and business travel and so forth.

00:24:58.680 | But domestic travel, if you look at China, is almost quote back to pre-COVID level restaurants

00:25:03.280 | again.

00:25:04.280 | And so we will see that and so we will see affirming in those areas and that will get

00:25:08.640 | us closer to the 2 percent.

00:25:10.560 | And then third is the risk for the first time since I've been at Vanguard, other than perhaps

00:25:16.080 | early 2006, we saw that oil prices, as we recall, going to one hundred dollars a barrel

00:25:22.280 | for the first time.

00:25:23.280 | You know, our team, Maria, sees a modest risk towards the upside in inflation, not material,

00:25:29.400 | nowhere near the 70s.

00:25:31.140 | This notion that we will return to a high inflation world, I think, underestimates some

00:25:35.720 | of the forces that have kept inflation at bay for a long period of time.

00:25:39.840 | Technology, globalization and the Federal Reserve.

00:25:43.280 | But that's not to say that even with those forces, you can't you can't have inflation

00:25:47.280 | a little bit higher than expected.

00:25:48.500 | So I think fiscal policy is the wild card.

00:25:51.380 | This fiscal policy and increased fiscal spending, if it's consistently aggressive over the coming

00:25:56.940 | three or four years, does that start to raise everyone's expected inflation rate?

00:26:03.100 | Maybe not 2 percent, maybe two and a half, three percent.

00:26:06.080 | That's that's the wild card.

00:26:07.080 | That's what we have started to model and what we think about.

00:26:09.940 | It would mean that interest rates would be a little bit the rise would be a little bit

00:26:13.220 | higher than we anticipate.

00:26:15.660 | But that's the risk.

00:26:16.660 | So it's but this is not a return, you know, believe me, it's not.

00:26:20.940 | It's certainly in the next few years a return to, you know, the seven, the 1970s.

00:26:24.860 | And I am not complacent on it.

00:26:26.380 | I'm just telling you, when you do all the math and all you look at all the what drives

00:26:30.580 | inflation and it's a comp explain, you know, in understanding inflation is a very complex

00:26:35.420 | phenomenon.

00:26:36.420 | But when you apply all all the all the variables that matter, you know, we have an impaired

00:26:40.940 | labor market and we have also pent up demand.

00:26:43.380 | And we do all that calculus.

00:26:44.980 | It does say we're going to have inflation start to rise.

00:26:47.460 | It should kind of crest roughly around 2 percent, maybe a little bit higher than and then kind

00:26:52.060 | of settle in around two.

00:26:53.980 | But if there's a risk, it may go a little bit, you know, at the end of this year, may

00:26:58.180 | recover a little bit more quickly.

00:27:00.380 | And that can take that, you know, we don't get we have to stay in the course of our investment

00:27:06.100 | portfolios.

00:27:07.100 | But that's the one probably source of volatility this year.

00:27:09.460 | If the market's temporarily down five or 10 percent, I would say more likely than not,

00:27:14.180 | probably because we're going to have a month or two where inflation perhaps comes a little

00:27:17.180 | bit higher than expected.

00:27:19.180 | We had that a few years ago.

00:27:20.420 | Eventually, things will calm down.

00:27:22.260 | But that's probably the sort of and we identify that in our risk report.

00:27:26.340 | You know, that's the one sort of source of volatility this year that we should just be

00:27:31.580 | prepared for, you know, and just try to look for.

00:27:34.820 | OK.

00:27:35.820 | Good.

00:27:36.820 | OK.

00:27:37.820 | Another.

00:27:38.820 | Yeah.

00:27:39.820 | This is a common question.

00:27:40.820 | So 2020 was an election year.

00:27:41.820 | There's lots of uncertainty that goes along with that now that as we move into 2021 and

00:27:45.740 | we have more and it was just not the presidential election, but also with Congress, as we have

00:27:50.100 | more clarity as we're heading into this year.

00:27:51.740 | What do you think about the policy changes that might be proposed and then what we might

00:27:56.100 | need to keep an eye out on or your thoughts around any potential policy changes and implications

00:28:01.460 | throughout the year?

00:28:03.220 | Well, you know, again, I mean, I think there's that that's actually among my biggest question

00:28:08.740 | marks as well.

00:28:09.740 | I mean, right now we're going to, you know, much greater the focus is on, you know, aiding

00:28:14.380 | the recovery.

00:28:15.380 | And the biggest thing is, is is the quickest we can get to anything, any dollar spent for

00:28:20.780 | vaccine distribution is you will make the recovery that much more quickly and have revenue

00:28:26.900 | stabilized.

00:28:27.900 | And as I said, I think longer term, we will see increased focus on on on tax rates to

00:28:33.100 | help fund some of the increased spending.

00:28:34.940 | Again, we had structural deficits under both parties, both political parties, you know,

00:28:40.060 | in the past, the past five or 10 years.

00:28:42.740 | And so that was that was an issue that if you look at the congressional budget office,

00:28:47.380 | which is nonpartisan agency projecting higher debt levels for the next 30 or 40 years, it's

00:28:52.820 | in large part because revenues fall short of expenditures by roughly three or four percent

00:28:58.300 | a year.

00:28:59.300 | And so that gap is going to have to close.

00:29:00.460 | I think we will see a number of things on the table with respect to the revenue side,

00:29:05.020 | I think, particularly for higher income households.

00:29:08.140 | I think we will.

00:29:09.140 | I think it's reasonable to expect that we will see modestly higher, you know, tax rates.

00:29:16.500 | But again, my personal view is, you know, there's a there's a whole cottage industry

00:29:22.780 | that tries to guess and you feel more than I do, Maria, right?

00:29:26.540 | Like how exactly should I should I anticipate the tax rates?

00:29:30.900 | I would personally rather kind of wait to see actually how they unfold rather than prognosticate

00:29:36.620 | on what form of tax rates we will see.

00:29:40.000 | And then once I have that clarity, if that has some implications for my estate planning

00:29:44.500 | or my tax planning, I do it with one hundred percent more information rather than trying

00:29:49.220 | to guess.

00:29:50.220 | I do know that, you know, regardless of that, you know, Vanguard will continue to underscore

00:29:55.340 | and I think we'll we'll clearly endure the importance of retirement savings, the importance

00:30:00.740 | of savings.

00:30:01.740 | And I think the last point, which is not so much a tax policy perspective, Maria, it was

00:30:08.140 | everything you mentioned with respect to the headlines and the fact that all Vanguard investors,

00:30:14.460 | particularly those on the call.

00:30:15.460 | I mean, I think everyone's long term orientation to continue to remain invested, balance, diversify,

00:30:23.100 | stay in the course.

00:30:24.100 | You know, if there was ever going to be a year that was going to challenge that investment

00:30:28.180 | philosophy, 2020 and Covid was going to be it.

00:30:31.860 | And if one had seen the headlines, I think many in March and April, I remember seeing

00:30:37.020 | the media, many were saying run for the hills and and look at the returns that we've seen

00:30:41.460 | this year.

00:30:42.460 | And I think it's just a vindication.

00:30:43.460 | And I think everyone is a long term investor should be pat on the back because the headlines

00:30:47.660 | were extremely troubling.

00:30:48.660 | It was, you know, something I felt because it was the headlines impacted one's not only

00:30:53.580 | professional life, it also impacted one's personal life and family and friends.

00:30:58.380 | It was a lot of emotion to take into account.

00:31:02.420 | And I think everyone should really pat themselves on the back that that was not easy to do emotionally.

00:31:07.900 | Right.

00:31:08.900 | Kudos.

00:31:09.900 | And so, again, it was just another underscore moment for for the long term orientation.

00:31:14.980 | And that's always something I think that I know everyone on this call takes in mind.

00:31:19.700 | That's something I think I continue to remind family and friends, even more so than the

00:31:24.180 | task, which are fair questions for you with respect to tax rates and so forth.

00:31:27.820 | Like first order principles, continuing to stay invested in the markets, can you continuing

00:31:32.940 | to stay diversified?

00:31:33.940 | OK, if that's yes, then I'm happy.

00:31:37.460 | Tax rates are going.

00:31:38.460 | But let's make sure that we take care of business first.

00:31:41.260 | Yeah.

00:31:42.260 | No, last year was hard, Joe.

00:31:43.660 | Yes.

00:31:44.660 | Because, I mean, a lot of individuals are impacted by it, not just personally, but professionally

00:31:48.840 | as well, unanticipated furloughs and things like that.

00:31:52.100 | And while some of the provisions in the CARES Act could help, I mean, we have individuals

00:31:56.260 | who are really dealing with some significant financial challenges, both near term and long

00:32:01.100 | term.

00:32:02.100 | So how do you actually unpack that and focus on the things that you need to now, you know,

00:32:06.700 | as opposed to just, you know, reacting and looking at this longer term?

00:32:11.820 | In terms of the taxes, you're spot on.

00:32:13.220 | I'm starting to get more questions around that now in terms of, you know, some of the

00:32:17.140 | Biden proposal has some structural changes in it, as well as with the state taxation.

00:32:21.980 | But we don't know exactly it's a proposal.

00:32:24.140 | We don't know what or when or how and if individuals are thinking through things, you know, my

00:32:29.840 | suggestion there would be, you know, maybe hold off until we maybe we have some more

00:32:33.580 | clarity around this or some certainty, but never really let the tax situation drive the

00:32:39.460 | fundamental decisions of investing.

00:32:44.140 | But there are, you know, certainly on our watch list this year.

00:32:46.860 | And as we get more clarity around that, we'll see more from Vanguard as well on that front

00:32:50.920 | too.

00:32:51.920 | OK.

00:32:52.920 | That's why it's good to know Maria Bruno at Vanguard, not only because for my own, for

00:33:01.020 | my other questions I have, I mean, Maria is my first call.

00:33:04.500 | Help me out here.

00:33:05.500 | Well, the thing is, if I don't know the answer, I know where to go.

00:33:07.780 | Right.

00:33:08.780 | We've got strong teams with us.

00:33:09.780 | Right.

00:33:10.780 | All right.

00:33:11.780 | So, Josephine, let's think about the financial markets.

00:33:15.560 | So the market recovery that we had in 2020 was just as surprising as the decline was.

00:33:22.460 | Given what, where we were, where we are now, do you think the markets are fairly valued?

00:33:26.660 | What are your thoughts there?

00:33:27.660 | Well, as everyone on the call, you know, it's, you know, Vanguard, you know, I'm really proud

00:33:31.620 | of our framework.

00:33:32.620 | We take, you know, we don't talk about short-term market, you know, ups and downs.

00:33:36.620 | When we talk about our reasonable range of expected outcomes for whether it's stock returns

00:33:42.460 | or bond returns.

00:33:43.460 | We're talking about broad portfolios, say the total stock market, total bond market.

00:33:48.780 | And we look out for a long period of time, at least 10 years.

00:33:52.540 | And I'm proud of our forecast.

00:33:54.180 | I think it's also reasonable to expect that those expected returns can vary through time.

00:33:57.980 | I mean, we all know that as bond investors, right?

00:34:00.540 | The expected return on the bond portfolio today is materially different from where it

00:34:03.900 | was in 1980.

00:34:06.140 | And so we just use that simple logic, but also recognize humility that this is the future

00:34:11.700 | we're talking about.

00:34:12.700 | So it's all ranges of return, but it's really grounded in the latest academic research from

00:34:17.820 | finance, which we apply at Vanguard.

00:34:20.760 | So we're both humble, but also rigorous with respect to that.

00:34:24.060 | But that is context.

00:34:25.060 | I'd say, you know, our outlook, I've been fairly proud.

00:34:27.780 | I mean, even though the course of 2020, Maria, right?

00:34:30.300 | We were actually, you know, remember March and April, the free fall in the stock market?

00:34:36.420 | I remember.

00:34:37.420 | Yeah.

00:34:38.420 | We're not market timing.

00:34:39.420 | We're just saying if anything, our market outlook had gotten more positive for the first

00:34:42.860 | time.

00:34:43.860 | It was a material upgrade in our long-term equity projections because we dropped below

00:34:47.580 | fair value as the market really sold off very aggressively.

00:34:52.940 | And so we said we didn't know the timing of it.

00:34:54.860 | But again, close one's eyes next five or 10 years, expected returns on stocks are going

00:35:00.380 | to be higher than what we have in the historical average.

00:35:05.180 | So we got certainly the direction right.

00:35:07.580 | But certainly the magnitude surprised me.

00:35:09.100 | I mean, it was a very aggressive rise, most of which can be explained by the drop in interest

00:35:13.700 | rates, but not all of it.

00:35:15.500 | So how do you read that?

00:35:16.820 | It means today that we're above these wide ranges of what we call fair value.

00:35:20.900 | Fair value for any asset is what is reasonably explained by, say, earning for the stock market

00:35:27.300 | earnings growth, the level of interest rates, because these are discounted cash flows in

00:35:30.860 | the futures for all for all, say, publicly traded U.S. companies.

00:35:34.500 | And so you don't have a wide fair value range.

00:35:37.100 | And most of the time the stock market is in that range, which means historical like expected

00:35:41.980 | returns of eight or nine percent for planning purposes is reasonable, right?

00:35:48.340 | But every so often you deviate from those ranges.

00:35:51.460 | We deviated well above.

00:35:52.780 | We were way expensive in the late 1990s, which led to, you know, had we had our capital market

00:35:58.140 | small, we would have had just expect lower expected returns in the next five or 10 years.

00:36:03.140 | Not sell one's investments, just for planning purposes, expect lower returns.

00:36:06.820 | We sit here today.

00:36:07.820 | The outlook for the equity risk premium is still positive, somewhat lower than historical

00:36:12.100 | average.

00:36:13.100 | The biggest reason why we expect lower returns, Maria, is not because the stock market itself.

00:36:17.360 | We still expect in the vast majority of cases, high probability that the next 10 years stocks

00:36:22.620 | will outperform fixed income.

00:36:24.500 | It's just that the fixed income and money market returns are materially lower.

00:36:29.420 | And that's because the level of interest rates in the Federal Reserve.

00:36:32.540 | Right.

00:36:33.540 | So that is the prime.

00:36:34.540 | So all the expected returns for all assets in one's portfolio are modestly lower.

00:36:39.780 | It's not because we're bearish on the financial markets.

00:36:42.720 | It's because of just the level of interest rates in money market funds.

00:36:47.780 | It's not because of money markets, but it's because of Federal Reserve and Fed funds rate.

00:36:51.660 | That has implications for the bond premium.

00:36:54.660 | So why should I have expected returns higher for a bond fund than a money market or for

00:36:58.620 | a stock fund equity risk premium over bonds and money market?

00:37:02.140 | That impression is more for everyone.

00:37:05.900 | So that's the primary implication.

00:37:07.600 | And we generally have shaped two or three, the model shaped two or three percentage points

00:37:12.660 | off the expected returns for all those portfolios on a five or 10 year basis.

00:37:18.860 | But it's not because the markets are grossly overvalued.

00:37:21.700 | You know, they're at the high end of the range.

00:37:24.180 | I have some concerns about some of the aggressive, I'm starting to see some aggressive behavior,

00:37:30.820 | not by Vanguard investors, but the industry at large, the IPOs, some mega cap growth companies,

00:37:36.660 | you know, really concentrated returns.

00:37:39.260 | So I think there's definitely froth in parts of the market, things even, quite frankly,

00:37:44.660 | like Bitcoin, I see there's some froth, one could argue, but it doesn't mean the market

00:37:50.780 | is unsustainably high, it just means that we may see a little bit of a correction.

00:37:56.580 | One thing I think that is missed by many in the market is that even if we have modestly

00:38:00.620 | expected returns, say for U.S. stock, let's say in the four or five percent range over

00:38:04.500 | the next 10 years, that's certainly lower than historical average of nine or 10, say

00:38:09.300 | roughly five percent.

00:38:10.980 | If you own a broad basket of securities, that certainly could outperform a very concentrated

00:38:16.140 | one.

00:38:17.140 | You know, gross stocks have outperformed value companies by the largest in U.S. history ever

00:38:21.300 | recorded.

00:38:22.300 | And so if one is, you know, if one is taking a broadly diversified approach, I think that

00:38:28.820 | may mitigate some of the risks.

00:38:31.300 | Some investors, I think, have become very concentrated.

00:38:34.340 | It has served them well in the past several years, but past is not necessarily prologue.

00:38:38.700 | And so some investors, you know, could see actually lower expected returns than our central

00:38:43.740 | tendency because of those concentrated conditions.

00:38:47.420 | So that is a broad brush, but it's not bearish.

00:38:52.700 | Lower expected returns, but that's in part because of what is going on in interest rates

00:38:56.460 | in general, which I think is a natural expectation.

00:38:59.300 | OK.

00:39:00.300 | Joe, actually, I'm looking over here at my monitor because we're actually getting some

00:39:03.740 | questions in.

00:39:04.740 | As we go deeper into the financial markets, I think we've got a question in that is interesting

00:39:09.100 | and maybe just to briefly set the context, the underlying philosophy of a true bobblehead

00:39:15.020 | is really to tune out the noise, particularly with the near term.

00:39:19.540 | Why?

00:39:20.540 | Why are these projections, when we think about either the near term or the 10 year, important?

00:39:26.680 | And when you think about it in longer term planning, the relevance of a, say, a one year

00:39:31.260 | or a 10 year outlook versus, you know, a longer term.

00:39:34.780 | Yeah.

00:39:35.780 | And one of the reasons that I appreciate the question, Marie, you know, that's one of the

00:39:39.100 | reasons why even our outlook, we focus on 10 year numbers.

00:39:42.140 | I mean, most of the industry, including many of our competitors, in fact, we're not even

00:39:47.780 | in some media surveys because they're one year outlooks.

00:39:51.180 | So if you refuse to participate in them, that means we're not on TV as much, but so be it.

00:39:56.960 | Ten years is a, I think it's a relevant horizon, it's a very long horizon, but it's a relevant

00:40:02.200 | horizon, say, for planning.

00:40:03.200 | Now, for some, some, if I'm 22 years old and saying for retirement, it's well beyond the

00:40:07.880 | planning cycle, I think the outlook is less, it's less relevant.

00:40:11.840 | But for many, they may have a 10 or 15 year planning horizon and the cornerstone of asset

00:40:18.440 | allocation, which is the cornerstone of Vanguard's investment philosophy, stay diversified, balanced

00:40:23.040 | long term.

00:40:24.240 | But one of the things that that divides in a portfolio and asset allocation, say between

00:40:29.560 | stocks and bonds, that is predicated and the foundation of that is based upon the expected

00:40:34.480 | returns.

00:40:35.480 | If one, I mean, that's the foundation of Vanguard's philosophy.

00:40:39.860 | So you have to have a, what is a reasonable expected return?

00:40:43.860 | And so if we don't have this sort of outlook, what does one assume for a bond portfolio

00:40:47.920 | to my previous comments, right, Maria, should I assume historically, it would actually be,

00:40:51.840 | could you share, it would not be responsible to say, you're going to get historical like

00:40:55.840 | six or seven returns in fixed income, if I'm saving for the next 10 years, that means that

00:41:00.840 | I'm not going to be successful, the odds of me, that would mean the probability of me

00:41:04.720 | being successful in whatever invested saving and spending strategy I have as a retiree,

00:41:09.680 | as a saver, it's going to be miscalibrated.

00:41:13.160 | And so we have a responsibility to say, what are reasonable ranges of expected returns

00:41:17.640 | that one can then plug into the investment problem or the investment goal one is trying

00:41:23.360 | to achieve, right?

00:41:24.360 | It may not mean radical changes, but you know that, right, and even our advice units and

00:41:29.680 | our calculators on our website, how much do I need to save for retirement?

00:41:33.520 | How can I, how much can I spend safely in my retirement?

00:41:37.040 | That requires the expected returns being somewhat reasonable, not perfectly accurate.

00:41:43.080 | No one has that.

00:41:44.080 | If you don't, no one has that, but certainly we have, and expected returns do vary through

00:41:49.680 | time.

00:41:50.680 | And so we have a responsibility to say, what is a reasonable range for that?

00:41:54.280 | Sometimes a little bit higher than historical averages.

00:41:56.520 | Sometimes they're a little bit lower than historical averages.

00:41:59.160 | I think that's important to lay that information out there so that investors can make, you

00:42:03.600 | know, as intelligent, you know, decisions on their own certainty as possible in this

00:42:08.560 | world.

00:42:09.560 | And I, you know, we've done that for 10 years, I'm very proud of it because our first outlook

00:42:12.520 | 10 years ago, there was many investors, very concerned to invest at all, given the financial

00:42:17.720 | crisis, the low, this new normal, and actually we were, you know, our outlook was saying,

00:42:23.200 | actually, we're going to have historical like returns in the equity market, stay invested,

00:42:29.160 | stick to the plan, and that forecast was generally accurate.

00:42:33.560 | We didn't get the ups and downs along the way, but we got the end point, and that's

00:42:38.440 | important for planning purposes and doing risk return trade-offs with one client.

00:42:44.440 | Yeah, no, I agree, Joe, I get these questions a lot, particularly for retirees, and we can

00:42:49.320 | talk more about that.

00:42:51.180 | But when you're doing long-term projections, it's fine to use a Monte Carlo simulation

00:42:56.000 | where you're looking at different outcomes.

00:42:57.920 | But if you are looking at in the next, you know, one to three to five years, how much

00:43:01.440 | I should be spending for my portfolio, it would be imprudent not to think about what

00:43:05.160 | the initial conditions are.

00:43:06.600 | It's risky to bank on higher-type return expectations when the portfolio isn't expected to produce

00:43:13.280 | that.

00:43:14.280 | Yeah, I sit on some investment committees, I imagine you have many clients or, you know,

00:43:18.040 | council clients.

00:43:19.040 | Right.

00:43:20.040 | Like, for example, what's, I'm a very conservative investor, but I'm trying to draw 4% for my

00:43:24.640 | portfolio over the next decade for spending.

00:43:28.360 | Or some institutions I serve on, they have a fixed, they have a target of 4% spending.

00:43:35.000 | How should they allocate their portfolio now?

00:43:37.280 | It may be different.

00:43:38.280 | In fact, it is different.

00:43:40.040 | My council versus 25 years ago when they could have been 60/40 because of the bond return

00:43:46.040 | component.

00:43:47.040 | This does not mean that bonds don't have value, it just means a lower expected return.

00:43:51.240 | It may mean they either cannot spend 4% from their portfolio, they have to save more, I

00:43:56.760 | mean, that's one certain viable path.

00:43:59.240 | Or they're going to have to, there's no magic bullet, they're going to have to take on more

00:44:01.640 | risk, which means more equity-like risk, perhaps 70/30, right?

00:44:05.480 | And let's talk about those trails, it's not one better than the other, let's just, let's

00:44:10.280 | look at the comfort level with that, the pros and cons of that.

00:44:14.180 | And I think that's the sort of conversation that these sort of ranges of returns allow

00:44:18.800 | investors to have.

00:44:20.440 | Again, if one has a hundred year horizon or so, the initial conditions do not matter.

00:44:27.240 | But for, again, for some investors that's appropriate, for many investors, anywhere

00:44:31.380 | from a horizon from five years to 15 or 20 years, then I think that's where our sort

00:44:38.440 | of planning projections, I think can be helpful.

00:44:42.080 | Right.

00:44:43.080 | Right.

00:44:44.080 | So, Joe, let's get a little deeper with our market outlook.

00:44:49.800 | So US equity returns, we're looking at a projection, you know, not much unchanged from

00:44:56.940 | last year, right?

00:44:58.000 | Anywhere around 3.7% to 5.7%, I believe, in terms of the 10-year forecast for equities.

00:45:06.020 | Let's talk about that, I guess, in a couple of facets.

00:45:09.280 | One, we would be remiss at a BogleHeads event if we do not discuss US versus international.

00:45:14.840 | So the projections are much more bullish than the national forecast.

00:45:18.240 | So let's talk a little bit about what's causing that, what to expect, what to think about

00:45:22.480 | that in terms of diversification and asset allocation.

00:45:25.680 | Yeah.

00:45:26.680 | And that's, you know, that's one of those rich topics, Maria, you know, Jack and I used

00:45:30.820 | to talk about.

00:45:31.820 | You know, he was not as big of a fan, certainly, or supporter of having, you know, non-US equity

00:45:38.040 | exposure.

00:45:39.040 | He wrote about it.

00:45:40.480 | I mean, obviously, the US market has been the strongest performing equity market among

00:45:47.640 | the highest in the world in the past five or 10 years.

00:45:49.680 | It's steadily outperformed non-US markets.

00:45:53.080 | But you know, past is not prologue.

00:45:54.480 | I mean, without doubt, the lowest volatility portfolio is a global portfolio.

00:45:59.280 | That does not mean, you know, that necessarily that US were out or underperformed depends

00:46:05.920 | upon where the fundamentals are.

00:46:08.760 | We are expecting or projecting, more likely than not, that non-US equity markets will

00:46:15.360 | have somewhat higher expected returns going forward.

00:46:18.160 | It's not because of any sort of view on the US dollar, it's primarily because of where

00:46:22.400 | valuations are.

00:46:23.400 | And if you look at, particularly in the US growth arena, valuations are at pretty high

00:46:29.240 | levels.

00:46:30.240 | I mean, they're close to late 1990s.

00:46:32.440 | So if there, and there is, there's some, certainly some strong evidence historically that when

00:46:38.200 | you have these sort of, you know, dislocations or deviations, I should say, that over time

00:46:44.840 | they tend to, you know, conditionally they tend to converge.

00:46:49.400 | And so that is the primary reason why we anticipate non-US markets to have higher equity returns

00:46:57.000 | in the US.

00:46:58.000 | It doesn't mean that US, you know, it's, it's not a negative view on the US economy.

00:47:02.960 | It's not a negative view on US earnings.

00:47:04.760 | It's the fact that the prices that investors are already paying for US fundamentals is

00:47:10.440 | markedly higher than they are for European companies, emerging market companies and Asian

00:47:15.760 | companies, and history shows that where we currently sit, you know, the risks are towards,

00:47:24.240 | it's one sense that the price is being paid for the rest of the world's growth is much

00:47:29.560 | cheaper today.

00:47:30.560 | And so if you have a long-term orientation, and certainly I adhere to this, in our, in

00:47:35.360 | our, in many of our portfolios we provide clients, right, balance portfolios, have non-US exposure,

00:47:40.800 | right.

00:47:41.800 | And we can all debate what that, what that optimal one is.

00:47:45.360 | But certainly have some non-US exposure is going to help on our return perspective.

00:47:49.080 | I think it's prudent to have it, even if one doesn't expect part of the world to outperform

00:47:52.960 | the other, because it's about modest volatility reduction on average, but, you know, that,

00:47:58.580 | that is a component of our outlook.

00:48:00.400 | In fact, most parts of the, of the equity market globally, if they're outside of US

00:48:05.560 | technology companies are projected to modestly outperform.

00:48:10.160 | And we're not picking on that sector, it's just that those valuations are so extraordinary

00:48:16.080 | that it's, it's, it's, we've rarely, we have seen this before, but the times we've seen

00:48:20.820 | it before, you know, were the late 1920s and the late 1990s.

00:48:26.360 | I'm not saying, and that's the, that's the one thing about today's global equity market.

00:48:31.960 | We've seen a fantastic performance of the past five or six months, but it has not been

00:48:38.160 | broad based.

00:48:39.160 | It isn't like every single company has, you know, has doubled in value.

00:48:43.760 | It's, it's, so that's, that's good news in the sense of being broadly diversified, could

00:48:50.400 | help, you know, smooth out some of the underperformances, some companies that may have been starless.

00:48:55.200 | And I don't know what that time it is, I'm not picking on any one company, I'm just saying

00:48:59.360 | it's unlikely that all of them are going to continue to grow to the moon.

00:49:03.440 | And so having the broad basket, I think you'll see if our forecast is right, companies that

00:49:09.040 | are more value oriented, particularly some outside the US, will play some catch up over

00:49:14.960 | the next several years.

00:49:15.960 | The timing, who knows, but over the course of the next five years, it's, it's highly

00:49:20.040 | likely.

00:49:21.040 | You know, you beat me to that one, because we got that question before, Joe, around the,

00:49:26.840 | what are we going to get out of this value coma?

00:49:28.720 | It's been debating the industry.

00:49:29.720 | It is, yes.

00:49:30.720 | It's funny, I had the, I had the honor and the privilege to present to Vanguard's board

00:49:35.360 | of directors in December, it was on this topic, what's going on between growth and value.

00:49:40.160 | We have a lot of our active managers in our Vanguard active funds, you know, you know,

00:49:46.240 | whether it's like, you know, many of our active managers, some of us have a value sort of

00:49:51.800 | orientation, they tend to buy stocks that are, you know, lower in price to book, you

00:49:57.680 | know, so today, some of those value type companies are in the financial banking sector, energy

00:50:05.040 | companies, some tied to face to face services, some of them have gotten absolutely hammered

00:50:10.560 | on a price relative to some, you know, large technology companies and, and, but the perplexion

00:50:17.760 | is that actually, for the past 10 years, growth companies on average have drastically outperformed

00:50:23.240 | value.

00:50:24.240 | So there's some in the industry actually questioning the value philosophy, which is actually a

00:50:29.080 | cornerstone of everything from Vanguard's generally active approach, and, and, and many

00:50:37.160 | academic research.

00:50:38.160 | So there's a big debate, but my research I presented to the Vanguard board of directors

00:50:43.080 | was that you can explain not all but but a lot of values on a performance in part because

00:50:49.040 | of the sector dropping in inflation and interest rates.

00:50:52.120 | And so if we have a modest recovery is participating, value companies will generally, you know,

00:50:58.760 | come back a little bit, they may not completely, you know, recover all the relative on a performance.

00:51:03.760 | I mean, the US growth index is up by 40% over the US value index.

00:51:09.520 | And that's, that's like, that's astronomical.

00:51:11.560 | I mean, that's like, five years worth of historical like, stock returns squished in the one year

00:51:18.040 | on a relative basis.

00:51:19.920 | And we've rarely ever seen that dichotomy and, but and then over and above the fundamentals,

00:51:26.560 | those stocks have continued to outperform you when you control for things like secular

00:51:31.640 | change and platform effects and all these technology buzzwords.

00:51:36.100 | So I'm not saying that this is the, you know, the turning point when some of these value

00:51:42.080 | companies start to come back and contribute more quality to the equity market.

00:51:46.520 | It's just that, you know, continued outperformance is unlikely at least over a five year basis.

00:51:52.200 | But, you know, that that, again, there's there's a lot of active managers, in part have underperformed

00:51:58.520 | in part because of the value premium, not really manifesting themselves in the equity

00:52:03.560 | market.

00:52:04.560 | Okay.

00:52:05.560 | All right, Joe, we've got a few minutes left.

00:52:08.560 | Time is flying.

00:52:09.560 | Let's um, let's just real quick talk about there's two things I want to touch upon.

00:52:15.600 | One is we've talked about the bond environment, low yields.

00:52:20.200 | What's the message to investors, particularly retirees who are looking to try to eke out

00:52:23.720 | extra yield either through, you know, credit or the yield curve?

00:52:29.400 | What are your briefly your thoughts there?

00:52:30.920 | Well, I'd say, you know, I think, again, the more that one tries to eke out the returns,

00:52:35.960 | I just the more one just is going to have to weather, you know, a month or two or a

00:52:42.680 | quarter to potentially where the nav drops a little bit because you're just we're going

00:52:48.160 | to we have we have credit spreads that are approaching, you know, whether it's municipal

00:52:52.360 | spreads over treasuries or corporate bond spreads over treasuries that are approaching

00:52:56.880 | close to historical hikes.

00:52:58.200 | Yeah, there's still an expected return on a corporate bond portfolio or municipal bond

00:53:03.080 | portfolio is certainly higher than treasuries because of the risk there.

00:53:05.960 | But that doesn't that's not a free launch.

00:53:07.920 | And so that doesn't mean don't lose a message just means that you have a very low income

00:53:12.600 | cushion as well.

00:53:13.600 | Yield to maturity is fairly low, historically.

00:53:17.400 | And so I think we all hope for a somewhat higher return from our bond portfolio.

00:53:22.440 | That means that we're going to have to just look through, you know, period two where you

00:53:26.440 | have a slight drop in the nav.

00:53:27.960 | That's the natural reset.

00:53:28.960 | Right.

00:53:29.960 | And you have less income cushion to absorb, you know, a modest rise in corporate spreads

00:53:35.240 | or municipal bond yields, right, particularly as the recovery continues.

00:53:40.240 | So, again, a healthy recovery means healthier bond returns for the five or 10 or 15 year

00:53:46.640 | period.

00:53:47.640 | Certainly that's what I'm hoping for.

00:53:48.640 | I mean, if we're here five years from now with the same interest rates, Maria, something

00:53:51.680 | has gone terribly wrong.

00:53:55.680 | And so I don't think anyone wishes that.

00:53:57.800 | So the converse, though, is, OK, if I want higher expected returns, you know, no pain,

00:54:02.600 | no gain.

00:54:03.600 | And I'm not talking about a lot of pain.

00:54:04.600 | I'm just talking about some nav fluctuations as we kind of have a gradual rise in interest

00:54:09.440 | rates over the next several years.

00:54:11.520 | So that's going to be a little bit different from, you know, the past.

00:54:15.840 | But I do know, particularly for conservative investors, that can be a little bit unnerving

00:54:19.920 | if they see the bond portfolio drop down in value for a little bit, right, because they're

00:54:24.480 | more conservative investments.

00:54:25.480 | Hey, I expect that from equity bonds, but I don't expect that from fixed income.

00:54:29.160 | Well, the more they're going to try to reach for yield then, particularly dabbling into

00:54:33.000 | high yield or emerging market, yeah, there's a higher risk premium because of the greater

00:54:36.960 | volatility.

00:54:37.960 | But one, I just I hope they don't have the expectations for money market like returns

00:54:42.640 | without any volatility because we have a low income question.

00:54:46.680 | And so we just have to, you know, just have to be mindful that I know I'm prepared for

00:54:49.960 | that.

00:54:50.960 | But we're going to have to talk to ourselves, I think, before they occur.

00:54:54.800 | And I think I'll generally be orderly.

00:54:56.080 | We won't have a massive spike in interest rates.

00:54:59.160 | We're not.

00:55:00.160 | OK.

00:55:01.160 | All right.

00:55:02.160 | Good.

00:55:03.160 | Thank you for that.

00:55:04.160 | And then last thing.

00:55:05.160 | But we did get this question before.

00:55:06.160 | We get this question a lot.

00:55:08.160 | Bitcoin.

00:55:09.160 | Well, it's not a currency, I think the market's expecting it to be a future currency.

00:55:15.440 | I think it's debatable.

00:55:16.440 | I don't think, to be honest, I don't think many central governments will allow it to

00:55:21.240 | become legal tender.

00:55:23.000 | I'm particularly skeptical that China or the United States would allow Bitcoin to usurp

00:55:29.220 | the U.S. dollar in Chinese renminbi.

00:55:32.320 | The Bitcoin market is spitting in my face on that, to be blunt.

00:55:36.880 | However, it could very well become a collectible.

00:55:40.700 | I used to collect baseball cards.

00:55:43.640 | If you collect the baseball cards or other, the Mickey Mantle baseball cards were worth,

00:55:48.760 | I think, over a million dollars in mint condition.

00:55:50.740 | So it is not to say something that is very finite supply that is valued by a community.

00:55:56.440 | It cannot have utility value.

00:55:58.680 | And collectibles generally have that, where my brother would say, I could care less if

00:56:03.000 | I had that baseball card.

00:56:04.240 | That has utility for me.

00:56:05.480 | Others, it's Beanie Babe or something else.

00:56:07.600 | I don't mean to be dismissive of Bitcoin.

00:56:10.040 | It could have value.

00:56:11.160 | But I think, you know, but I've been shocked by its astronomical rise.

00:56:15.800 | The one thing that's difficult with Bitcoin, Maria, is that it's very tough to argue what

00:56:20.640 | is its fundamental value.

00:56:21.760 | But I can tell you that the cost to mine the coin is lower than today's price, right?

00:56:29.120 | And so that would suggest potentially it's overvalued.

00:56:31.780 | But again, I don't think it'll ever become legal tender.

00:56:36.320 | That does not mean, however, that could mean the price could go closer to zero.

00:56:41.020 | But it may mean it could still stay up well above zero because it becomes a sort of, when

00:56:46.120 | I say commodity, I think collectible is the more, the more, you know, there's value.

00:56:50.680 | But at the end of the day, it's just a piece of fabric, right?

00:56:54.120 | But the Picasso painting has some incredible value.

00:56:56.400 | I just don't know.

00:56:57.400 | I mean, is it a Picasso?

00:56:58.400 | Is Bitcoin a Picasso?

00:57:00.360 | Or is it the thousands of paintings that are produced every day that have hardly any value?

00:57:04.440 | Right, right.

00:57:05.440 | OK.

00:57:06.440 | That's the heart of the question.

00:57:07.440 | OK.

00:57:08.440 | OK, good.

00:57:09.440 | Thank you, Joe, for that.

00:57:10.440 | So, all right.

00:57:11.440 | So, of course, we run out of time.

00:57:13.080 | But I do want to have a little fun because I think our Boglehead friends are expecting

00:57:16.920 | a little fun, too.

00:57:18.160 | So, I want to start you with a quick lightning round of questions.

00:57:20.640 | And I mean quick.

00:57:21.640 | OK.

00:57:22.640 | So, here we go, Joe.

00:57:23.640 | What's the first media source that you go to in the morning when you log on?

00:57:27.400 | Barry Reynolds.

00:57:29.000 | OK.

00:57:30.000 | What's the last book that you read?

00:57:32.800 | Life Fragility.

00:57:33.800 | OK.

00:57:34.800 | So, here's a good one.

00:57:35.800 | I came up with these this morning, in case you're wondering, Joe.

00:57:40.840 | So, what would Joe, the senior economist that you are today, tell Joe, the more junior economist

00:57:47.600 | that I met 15 years ago?

00:57:50.400 | Be more patient in one's personal life.

00:57:56.680 | Is your wife watching?

00:57:57.680 | I'm a very impatient person that has positives and negatives to it.

00:58:03.640 | OK.

00:58:04.640 | All right.

00:58:05.640 | And lastly, sum up 2021 for us in one word.

00:58:10.880 | Your days ahead.

00:58:11.880 | If I were to ask this question of myself, I'd say hope.

00:58:18.080 | Yeah.

00:58:19.080 | Yeah.

00:58:20.080 | All right.

00:58:21.080 | Thank you, Joe.

00:58:22.080 | It's been a pleasure sharing this virtual stage with you.

00:58:23.800 | And I thank the Bogleheads as well for their interest and their time.

00:58:28.240 | So, Rick, I'll turn it back over to you.

00:58:31.520 | OK.

00:58:32.520 | Well, thank you, Maria and Joe, for that great discussion.

00:58:36.800 | It's always interesting to hear Vanguard's perspective on what's going on and particularly

00:58:41.240 | what might come forward.

00:58:43.800 | This presentation has been recorded and it will be available soon on boglecenter.net.

00:58:48.000 | And our next Boglehead speaker series live event will be next month.

00:58:52.480 | And it will be a panel discussion from some of your favorite Boglehead experts.

00:58:57.000 | So thank you, everyone.

00:58:58.880 | And we hope you have a safe and happy new year and see you next time.

00:59:02.280 | Bye-bye.

00:59:03.280 | Bye-bye.

00:59:04.280 | Bye-bye.

00:59:05.280 | Bye-bye.

00:59:06.280 | Bye-bye.

00:59:06.280 | [BLANK_AUDIO]

Bogleheads® Speaker Series – Joseph Davis & Maria Bruno

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