I just noticed that in your presentation the assets where Vanguard really took off and spiked and just left the building, the trail, happened about 2007 and another thing happened in 2007, and I wonder what the correlation is, that was the founding of the local heads of Oregon. Well, I'm glad to answer your question.

Alright, without further ado, a number of years ago Jack asked if he could have a chat with Bill Bernstein in a normal non-political chat, and we all know what Jack wants, Jack gets, and it's become known as the Farside Chat. So, without further ado, I'd like to introduce Jack's companion for the Farside Chat.

He's a retired neurologist who helped co-found Efficient Frontier Advisors. He's written a number of best-selling titles in both finance and economic history. He holds both a Ph.D. in chemistry and an M.D. Please welcome one of the smartest guys I know, Dr. Bill Bernstein. Well, since you made sure that you made this non-political, I'm going to start with Keynes vs.

Hayek. For those of you who aren't quite familiar with the debate, Keynes said that you could-- Oh, am I okay now? Yeah? Okay, is that better? Yeah, yeah, yeah. Well, I'm sorry, I can still do this tomorrow. So, you know, for those of you who aren't familiar with it, Keynes basically says that the arrest of Senator Hayek is necessary to bring down the punch bowl.

It's not necessary to take it away. What's necessary in Hayek said that, you know, you only encourage booms and busts if you get hard on inflation. And, of course, this became relevant in 2009 when the Fed brought out not just the punch bowl, but the whole liquor store. And, you know, we haven't seen inflation, but there's still the risk of booms versus busts.

I see things getting fairly strong from all the equipment. I'm wondering, Jack, how much you worry about that? Well, let me say, again, with a perspective that reminds me of a comment from Mao Tse-tung, the Chinese leader. Mao Tse-tung, the Chinese leader, I guess would be better, was asked about the implications of the French Revolution, and Mao said, "It's too soon to tell." And I think that's pretty wise.

I'd say any Keynes has been importantly vindicated by this last go-around. I'm not sure what should have happened to our financial system, what would have happened if the Federal Reserve and the Treasury were small to some extent, and the Congress to some extent. Back in those days, the Congress did things.

Oh, I'm not supposed to say that. And they pumped and pumped and pumped, and they're still really stopped pumping, but they're not taking out any of the well. And I think that helps to explain why we have all the industrialized countries in the world have had the best recovery.

Switzerland may be ahead, but if you look at France, Italy, all the grease out, the United Kingdom and so on, no question our recovery has been stronger, and I give the Fed a lot of credit for that. Particularly since this time, the Fed is operating with, or the economy is operating with one hand tied behind the regulator's back, and that is the conventional economic wisdom.

You need not only monetary policy, such as the Fed does, pump, pump, priming, pump, as Bill said, you also need fiscal policy. You need to run government deficits and spend more, and we have not done very well on the fiscal policy side at all. And so the Fed has done it pretty much by itself, so how this will all be unbundled, I don't think anybody knows whether it will be unbundled and have those huge assets on the Fed balance sheet.

Everybody expects them to unwind, but maybe those will be the same for a while. And I think probably the most informed guess is going in the direction of thinking these low interest rates are going to last for quite a while. And if that's what all the smart money is saying, I, consistent with my personality, would say if the smart money is all betting no rise in rates, I'd bet on a rise in rates.

But I think that the smart money so far, whatever exactly that is, is about right. So I think Cain's got this one pretty much right in an imperfect world. But I relied much more on Cain when I studied him back in college for his help on understanding the markets, and that's essentially where he called it enterprise versus speculation.

The long-term yield of an asset versus the price that investors are willing to pay for it. And that's the fundamental of my investment theory, and I think increasingly everybody's investment theory. I think the most fascinating bit of data relevant to that is that if you subtract out the long-term TIPS yield from the long-term treasury yield, you get an imputed inflation rate over the next 30 years of 1.6%.

You know, if you want to make an economic historian laugh, you can tell from that figure, if you remember that figure. All right, well, Jeff, you turned the page of your soul after the second martini to the last one. I only had one. I only had one. But it was the best one, wasn't it?

And you told me that you own the International Bond Fund. Well, I guess maybe it was the martini. No, did you say I owned? Well, yes, it was in your retirement plan. Oh, no, I'm sorry. That is a misunderstanding. No, actually, the way the conversation went is that I decided to move to get a little more conservative in my retirement plan.

And I wanted to move, I'm presently in total bond market index and intermediate term in my personal accounts. And when you try and do it in your retirement account at Vanguard, they have a limited list of funds. And it includes total bond market fund, which for reasons I've said over and over again, I don't think is the optimal choice.

It's 70% governments. And I wanted to go to an intermediate term bond index fund, which is about 35% or 40%, or 45% to 50% governments. And I would like it to be even lower than that. But that intermediate term bond and the intermediate term managed fund, which is run just like an index fund, are not eligible choices for our retirement plan.

We have a very limited number of choices. And one is the total US bond market and the total international bond market. And so what I was complaining to Bill was, why are they offering that as a choice when they could offer something that would make a lot more sense for 90% of all investors?

So it's a small misunderstanding. When I do that, you've got to be kidding me. Well, Jack, now you've got your opportunity to tell me why I was so wrong about international value. Well, first, let's talk about if you want international value or international end value. International versus end value.

Well, international, my thesis is so clear in my mind. Sorry, my thesis is so clear in my mind, I can even hear that echo, so I know I'm doing okay now. And that is, first of all, if you invest in the S&P 500, you will own an international portfolio.

50% of the revenues, almost 50% of the earnings of US corporations come from outside the US. So it's not exactly portraits of America, Monroe Doctrine America, and you have an international portfolio already. And why do you need even more than that? And I don't think you do. The argument used to be the international fluctuated differently and therefore gave you a higher risk-adjusted return or something like that.

And I don't think those term fluctuations are worth a damn if they don't matter. If you're investing for 50 years, what do you care about that short-term correlation? And how many people even know what it is? But now, that situation has changed anyway. And the correlation between international and domestic US, or so-called international, or non-US stocks and US stocks, it ran for many years, a long time ago, 15 years ago, ran at about 35 or 40%.

And now it's about 85%. In these last couple of years, it may be 95%. In other words, you don't get that thing that people say has value that I don't believe has value. But whatever it is, it's gone. Is that too Pennsylvania Dutch an expression for you? So, the way I look at it is, and this is the way I kind of run all my investment thinking, get behind the data.

So, in concept, in non-US investing, you can say, well, it's a good idea to diversify or something like that, give you more companies, whatever you want to say. But I look behind the international index to see what's in it. And the largest holding is UK. The second largest holding is Japan.

The third largest holding is France. So, the UK, well, they're not doing so hot. Poor laborers vanished, or almost vanished from the scene over there. They still have more austerity than I think they should have. Their economy has not rebounded like ours. And I think their economy is, in a lot of ways, built on tourism.

It's kind of a yesterday thing. It used to be a huge coal mining country. That's pretty much gone. So, not so much to be said about Britain. Japan, very struggling society, very aging society. Every once in a while, a tsunami. What's so hot about that? That's a good combination, particularly with a tsunami.

And then I go to France. Oh, France. You know, they don't work there anymore. They were supposed to go to work 35 hours a week, and they went on strike. 35 hours a week. I mean, who works? Does anybody in the room work only 35 hours a week? I mean, I don't.

Now, I'm older than you guys. And then I go to another step. And I say, okay, I earned my money in dollars. I spent my money in dollars. I saved my money in dollars. And I invest my money in dollars. I am tied to the dollar, my own currency, in the most productive economy in the world, the most entrepreneurial economy in the world, the most innovative economy in the world, the most technologically advanced economy in the world.

And so I want to go away from that. And how is that going to improve my returns? And I also add this sort of closing thought. So I just don't see the merit of any of this. Why take a currency risk when you don't have to? Yes, it can be hedged, but it costs a lot of money.

And when you get international bonds -- I'll sneak back on that one, Bill -- the international bond yield is about 1.3%. And the U.S. bond yield is, depending on how you want to calculate it, 2.5 to 3%. And today's yield is what determines your future return on the bond.

So it doesn't seem to me like a good bet. So it's -- I don't want to worry about foreign currencies. I also know that with the exception maybe of Switzerland and Great Britain, the institutions, financial institutions in the United States are the most established in the world. The protection of shareholder rights is the most established in the world.

There isn't any possibility of currency controls getting in the way of mine and getting liquidity from my non-U.S. investment. So -- and my final icing on the cake is, when Warren decided to leave us 90% of his wife's estate that he's leaving to her in the S&P 500 index fund, he obviously wasn't thinking about international.

I did have the temerity to write to him when I saw that in his annual report a couple of years ago. As for money, I think we took in an extra $9 billion from the index. Business was like this, and then Warren's face, it goes like this. Just like the book thing.

And I don't know what he's going to do for us next year, but I'm sure he'll think of something. But -- so I did have the temerity to write him a note saying, "What would you think about using total U.S. stock market to the S&P 500?" And he never answered.

But I wouldn't have dreamed of asking him, "What about international indexing?" It's very clear he knows what he's doing. The bad news, the fact that I've been right all these years means totally nothing about the future. Maybe it will all be reversed, and I'll look like a damn fool.

So take that into account. But just think about what you're really trying to accomplish there. And, you know, after all these years of lagging performance, it would not be amazing to see the performance reversed and have better performance internationally in the U.S. And that could go on for a while.

But in the long run, as a message I was trying to say in the data I showed you this morning, it's determined by the strength of the economies. The stock market has nothing to do with it. And international stocks, non-U.S. stocks, look a little bit undervalued relative to the U.S.

Maybe even a little bit more than a little bit undervalued relative to the U.S. In terms of dividend yields, P/E multiples are lower. But maybe that's because they're riskier. Or is it because they're a good value? I don't think I -- I don't see the need for it. And then I would finally say, supposing I'm wrong, is it possible that internationals would do better by, say, 2% a year than the U.S.

in annual return over the next 10 years? I think so. But it's not going to matter whether you have 2% a year difference. I mean, that would be very large. But in the long, long shot, I think. And you put that on 30% of your portfolio compared to zero, you certainly don't want to go 100% international.

And you just get a very small increase in return unless you put everything there. In fact, the international will do better than the U.S. And I think that's an unwise bet. So I have this clear, logical case that could be wrong, like anything I do and say. But I do -- I guess I have to reverse the old expression.

I do not eat my own cooking. I don't do international. I never have. Yeah. You know, I'll fall back on Philip Tetlock, who writes about what lousy forecasters and games are, and how when we do have lousy forecasts, we never admit it. And I'll fall back on the cry of a lousy forecaster, which is, "I haven't been proven right yet." All right.

Well, the next question I suppose I have asks you ETFs. I'll start by asking for a show of hands. How many people in this audience own ETFs? All right. So maybe it's not my job, but it's close to. Can I ask a segment? Can I ask a segment? How many people trade them?

Certainly a few on both sides. Yeah, that's my point. And so, you know, I think that a lot of, if not most, small investors don't trade them. They just view them as cheaper, perhaps easier, or more fashionable substitutes for playing with elephants, TIFs. My question is, don't you think that the turnover figures for ETFs are skewed properly by institutional investors who trade the things for their own reasons?

The answer to that is, absolutely. And I'm trying to look for, I think I skipped this chart earlier. Let's see if I can find it here for just one second. Well, let me kind of do it for you. Oh, here we are. The ETFs are really two businesses. One is an institutional trading business, and one is an individual business, divided in half into people who are trading them with some activity, and people who are buying and trading them very rarely, if at all, because there are certain things you can do more easily in ETFs.

I heard from a shareholder the other day, just wanted to add money, but every once in a while he would throw up. He was told he was going to be thrown out of the regular fund, and he was not a big trader. It was regular investing, but every once in a while he needed some money.

And this is a triumph of process over judgment, I leave it to you. But they said he could no longer do that, so he switched to an ETF. A perfectly valid reason for doing what he was doing. So I think we have to think a little bit about that.

But if you look at, for example, the numbers, it states that the big ETF that's trading, dominant by far, is the S&P 500 spider. And it turns over, it's going to have about $6.1 trillion of turnover this year on a $150 billion fund. And that's largely institutional. You know, 98% of the shares are owned by institutions.

And they're going long, they're going short. Sometimes they're hedging on this early speculation. But it is the most widely traded stock in the world every single day in terms of dollar volume. That's something totally new to the markets. And that is, if I can tell you a little anecdote, which I described in this piece I'm writing for the Financial Analyst Journal on this very subject.

I was, a man walked into my office in 1992, Nathan Most, a really nice man. He sent me some papers down a couple of days before. And he wanted to use Vanguard 500 index fund, the only index fund worth talking about in 1992, as the basis for a new idea he had where you could trade it all day long in real time.

Trade the S&P 500 all day long in real time. Think about that. Think about why anybody, what kind of a nut would want to do that? But he was very nice, and I let him off easily. And I said, you know, we're the perfect partner for you. But I think index funds are designed to be bought.

I designed index funds to be bought and held forever. And this is the antithesis of that, so we're not going to do it. I, of course, consulted with, you know the answer, nobody. I mean, I'm such a bad person. But I didn't think I needed to consult with anybody.

I just rejected it out of hand by sitting in my office in Valley Forge, an old office, an old building. So he went on to State Street. And now it turns out I could have been the founder not only of the first traditional index fund, Index 500 in 1974, but Index ETF in 1992.

A lot of people will tell you that shows how stupid I am. I look at it as a badge of pride. I look at it as an ability to stand for principle instead of market share. And I'm honestly very pleased with my decision. I have no regrets about it.

And I don't mind shouting that from the rooftops. I can tell you more about who I am than probably anything else. So we have that business, that's the dominant party institutional business. And you look out, all of these State Street funds have 63% institutional ownership. All the BlackRock funds have 62% institutional ownership.

And State Streets turn over all their funds together at about 2,000% a year. BlackRock's at 600% a year. And Vanguard's with 43% institutional ownership, by far the smallest. And we have Spider turn over at 193% a year. I never thought I would be proud. I mean, I think the turnover of 3% is kind of pushing the envelope.

And here I am bragging about 193% of the co-figure. But there is a difference. There is a use for ETFs. And an intelligent use. But trading rapidly, back and forth, going from one sector to another, is not a good use. Being among the crazies, like ProShares, and Direction, and Velocity, and Power.

And very little institutional ownership. But they turn over the Velocity shares, one of our ETF people. It can be long or short of the market. You decide whether the market's going up or down today. I mean, how do you figure that out when you do? Just be sure you get it right.

And you can get triple leverage on that. So, if you're right and the market goes up 1%, you'll get 3% return on your investment in a day. That's an annualized return of $2 trillion, 2 trillion percent or something. I don't know what it is. So, they're just crazy, these leverage funds.

There's a lot of junk out there. There's a lot of what we call niche-seeking. Trying to find a little corn that nobody's started an ETF in. And people find them every day. Cloud-computed ETF. Emerging Cancer. Well, that one's come and gone. I thought it was not a very good name anyway.

And so, there's a lot of junk out there. And these guys have Velocity shares as a turnover of shares of 10,380%. And it's only 7% institutional ownership. Those are retail investors trading. Some of them are a lot smaller than the others. Power shares is the largest of the bunch.

It's about $100 billion. And they turn over 953%. I mean, they just--it really isn't trying to be. And I've not been very good at this, to be candid with you. ETFs are clearly the new way to speculate. Trading ETFs is almost as great as trading individual stocks in the New York Stock Exchange.

Going from 5% to about 95% of the trading compared to common stocks. So, we know that's going on. But there is another business going on out there. Though I haven't given enough time to, or enough thought to, of a useful ETF strategy. It comes back to my basic warning, which is a little bit cynical.

Maybe work a little bit. ETFs are fine, just so long as you don't trade them. As they say, but in English, exchange-traded funds are fine, just so long as you don't trade them. And I think bringing trading throughout the day, availability to investors, is not an asset. It is a liability.

And when you see that today, that one in the market went down 1,000 points in, I don't know, half an hour or something. A lot of ETFs traded at ridiculous prices. Maybe discounts of 50 or 60 or 70% of their asset value. Maybe there were some sharpshooters who bought them up.

And people sold them. They said they had an open sale order. And maybe the ETF was selling at 20. And they said, I want to sell it if it gets to, let's say, 19. But if it goes from 20 to 3, they sell it at 3. And that has actually happened.

So, we need to think about the structure of the ETF market, the structure of the stock market generally. I'm not naïve in putting in, you know, open stock orders, open sale orders, without a range of stocks, things of that nature. But there is a business there. If I had to guess, I'd say the ETF business is probably 65% institutional, 35% individual.

And I'd say maybe a quarter of the individual total. Because people are using ETFs in the right way rather than the wrong way. That's just a guess. Someday we'll find out. Maybe even bigger. I don't know. My opinion is that in a just world, any fund executive who brings out a leveraged or endorsed fund should be working on a just world.

All right. Well, let's shift gears a little bit. The Center for Retirement Research in the Lawson Coalition and Ellis Group is, for example, at risk index, retirement risk index every year. It was about 30%, 30% of people were at risk 30 years ago. And now it's on 51%. It increases every year by about a percent.

And the way it works for the new model, by the way, is it's very conservative. They assume that you take all of your retirement assets, amortize it, and file a reverse mortgage or house, which means that the real percentage of people who are actually at risk is probably much higher.

So do you think there's a retirement crisis? And what should we do about it? Well, first of all, yes, there is a retirement crisis. Yes, there is a retirement crisis in all three legs of the retirement school. What about Social Security? And it would be so easy to fix if we had the political will to do it.

It's very small changes in retirement age, in contributions, in maybe limiting withdrawals to people who have reached a certain level of other income. There are all kinds of ways to do it. And basically it would be not noticeable in the short run. But it's also politically charged. I can't get anybody to summon the willpower.

So if we don't do something, well, everybody knows this number. I can't remember quite what it is myself, but everybody knows it. And that is by 2023, I think it is. Unless we do something, Social Security will be paying out more than it's taking in. And it's easy to avoid that.

But we need the political will, which, not to get into politics, we just don't have any political will to do anything in Washington, let alone intelligent things like fixing Social Security. And it will get politicized like everything else, even like that fiduciary duty standard. And we'll get nowhere. But it can be fixed, so I'm optimistic that ultimately common sense will prevail.

Pension plans. Pension plans on the corporate side declining. Pension plans on the state and local side continuing to be very strong. And they are all assuming 7.5% future returns. They're about 62% funded on average. So that's sharply underfunded. And when they're counting on a 7.5% return to balance the books over the next, say, 25 years, they're not going to get 7.5%.

I mean, you've got to be kidding me when the government bond tenure note is 2.2%. And so there will be, I think, a movement away from index funds because people are going to gradually accept that the future returns in the market, which is what index funds will deliver, will be maybe that 4% a little bit low.

Maybe it's a lot low. Who knows? Maybe it's even high. We just don't know. But if you want to assume 5, you can't get in a balanced portfolio anything like 7.5%. So what the state and local funds are doing, it seems, is saying, "Okay, the index fund, money is coming in to index funds still, state and locally." But when they look at it, they say, "This just will not do." Well, let's say Pogo is right.

The returns are going to be lower. So how do we get higher returns? Well, let's get a couple of good hedge fund managers, and let's get some private equity managers. Well, first of all, two things. One, you have a tremendous selection premium. Which one do you pick? You know, there's no kind of common standard.

And they use these terms like "macro" and this and that. I don't even understand really what those various categories of hedge funds are. I do understand that very few of them are hedge funds. It's something we ought to think about. And that is to say, like my son actually runs an actual hedge fund.

And he's 50% long, 50% short. 40 long stocks, 40 short stocks. If he's long in the oil field, he'll be short in the oil field. It can't be more conservative. He has a beta of just about zero in the market. And it turns in like 5 or 6, 7, 8% returns year after year.

So that's a hedge fund, what they can do. These others are basically managers with unusual strategies. But only one common thread holding them together. It's a great money-making machine. Hedge funds are a product with high fees, enormous fees, for investment managers. They are a compensation strategy and not an investment strategy.

So are all hedge funds. There's no quirk in that. So they're not going to get it out of that. And even if one pension plan can do it, all pension plans cannot. This is another thing you want to do when you think about opportunities in the market. Can everybody do this?

And it's quite clear that all hedge funds could not possibly do well enough to carry that 7.5%. So corporate is going to leave it there because they're going to have to put more money in if they can't go to 5%, let's say, which is probably still a little too high.

And that means earnings will get added. And the CEO on the job today doesn't want his earnings to go down. He'll just hold it this way and let his successor get stuck with the problem. And they must think this way. I mean, they're businessmen and they want to look good.

We all do, I guess. And in state and local, it means either lower benefits, some of which are state constitution-enabled. You can't seem to get around it. Or the other thing is to do is not reduce benefits but raise taxes. And taxpayers have to approve tax increases. So the private pension system is going to be in shambles.

I mean, it's going to be a serious economic problem. The 401(k) system, the third leg, has a very simple and fundamental flaw. These were thrift plans. And we've tried to massage them into being retirement plans. So all the things you would obviously do in a retirement plan, you would obviously not do in a thrift plan.

Let people take their money out whenever they want to. Supposing you can take money out, cap a lot of your Social Security, you can count whenever you want. Would that make any sense at all? I mean, sometimes you really need it. But there has to be a very stern discipline about withdrawing or you're going to be a burden on the state by the time you retire, or the nation in this case.

So there has to be much less flexibility in allowing people to move their money in and out, to withdraw their money, to borrow against their assets. And it's going to be tough. But that's what a retirement plan would do. The thrift plan doesn't really matter. And so we've got to fix that fundamental flaw.

Actually, I remember talking to Paul Volcker. We were doing an interview at a 60th anniversary they had for me at the Museum of Finance that the financial industry held for me. And I was explaining. I said, "You know, if you'd give Paul and me"-- he was with me on the interview stand by a television announcer-- I said, "If you'd give Paul and me an hour, we could fix all three systems." And Paul looks up at me and says, "Couldn't we fix everything?" And I don't think we could.

So that's a complete answer, I think. Thank you, Jack and Bill. We'll be hearing more from both of them in the next couple of days. We're about 15 minutes later on the agenda. We're still going to take a 20-minute break. We'll catch up shortly with the Q&A, about 15 minutes with the experts, and we'll get back on schedule.

Everything else will follow. So you can take a break now. Thank you, Bill. Thank you, Jack. you you