Vanguard’s Bogle Sees Pension Pain in Decade of 3% Bond Returns

for the bondom market. We kick things off by discussing Jack's thoughts on the e t F business. Where I began was asking him about the freight train that is destined to be a ten trillion dollar firm within the next few years Vanguard, and whether he was worried at all about how quickly the E t F industry was amassing assets. Take a listen, Well, those two things don't

go to two together very well. Our strength at Vanguard has been the traditional index fund, the S and P five hundered total stock market, which I started way back in in and that has been our strength. Were that market and that traditional index fund market. I'll buy an old market broad market is about half of the index business and the E t F business is the other

half of the business, and they are totally different. They both have passive investment policies, but the traditional index funds have passive investors, and that the e t f s have active investors. So e t fs have heavy trading and they have a lot more speculation. They have a product line so called that that has very speculative funds. So I'm I wouldn't I wouldn't. I wouldn't predict that

that that would continue to flourish. You know, we have data here that shows that e t f have had as ten years is a four point seven annual return and the traditional index fund about a seven point one percent annual return. There was the e t f s have not worked out well for investors. I don't know why nobody knows this. So in a decade, the traditional index funds up about cumulatively and the E t F I mean, that's not that's not a strong record. This

is this is a really compelling point you're making. E t f s have not worked out well for investors. Are you concerned that they're going to taint the record of indexed funds because they are being treated, uh, synonymously. Well, I think there's a different, for the want of a better word, a different ethic and e t s. It's by the factors. It's leverage. It's finding narrow niches in the market very quickly to see if you can bring

a lot of the sheep in to share them. One of the most recent e t F was long electronic marketing, actually your retail marketing. I mean, that's an interesting idea, it might even work, but some entrepreneur jumps on that bandwagon and says, now he can package it for you. It's a very entrepreneurial business, or, to use a phrase that the great Henry Kaufman once used, is populated in many respects by financial buccaneers. So it's a different business.

It's finding product to sell and because there's a great market among brokers and investment advisers who want to sell it. When they want something to sell every day, they have to sell something every day. And that seeks the sort of the rationale for the business trading, trading, trading, and you see it most clearly, and it's a little bit of an off beat et F to say the least.

The spider, but it trades. They brag about it fifteen billion dollars an hour or something, and yeah, it turns over at about two or three thousand percent a year. And it's banks trading with one And that's that's a very different implication for the future of the E T F business than the than the more or less retail business that people are buying speculatives E T S. Mr Bogel, you talk about financial buccaneers. I'm gonna throw a couple

of topics that you want your thoughts. Bitcoin and cryptocurrencies. Well, I'm not so good as crypto, but let's talk about bitcoin. Bitcoin is a speculation. Why is this speculation because there's no underlying rate of return. Just like gold, stocks have earnings and dividends, bonds have have interest coupons to hold their value up. But the bitcoin has nothing in its value except that you want to sell it to somebody more than you paid for it. Well, that's about as

good a definition as you can get. It may be a great speculation, that's the funny part of it. But as I said the other day, um, and the bitcoin was then only about ten thousand, and you know, there's a speculation that I would have liked to plague, And I said, if it gets to twenty thousand, don't talk to me. Waitfil it gets back to a hundred, all right, they may not be buccaneers. Much of thoughts on the GOP's tax overhaul plan, as you know it. I think

it's very unfortunate. I think it has a grave moral issues in favoring the wealthiest people in the country that compared to the people who are doing all the hard work just seems crazy. Uh. I think it's really bad some little pieces of policy. You know, this is a country that's supposed to be helping education, and they put some new some taxes on young men and women who

are teachers and get fringe benefits. And then they've they've stopped the deductibility of interest on college loans, and those two things hurt education. Well. And what to what, avail I asked? The fusion of wealth, the gap in wealth between the rich and the poor is very upsetting to a good nation, a good society, and they made it worse. Rubs other than not, I love it real quick. Last question,

I'm just wondering. You said in recent comments that stock returns are likely to be about four percent over the next decade. What about bonds and where do you think are the most promising assets at this point? Well, stock returns. I've been doing this for twenty five years and ten years in ten year in ten year intervals, and my prognostications for stocks have been about correlation with what happened, and my view bond views are about of what happened. Correlation.

But the reason bonds are really easy. It should be a number of around three percent per year over the next decade because the only return you get on a bond is from the interest coupon. And so you have a portfolio half of corporate bonds and half of the ten year the ten year treasury, very conservative with a with a corporate half, and that gives you about three percent today and so that that's that's what you will

get in the next ten years. Of interest rates go down, the prices will go up, but over ten years that's up to even out. That's a huge problem for pensions with an eight a huge problem. It's totally defeating. The pension funds are not going to be able to meet

their seven and a half or eight percent obligation. And the curious thing is that back in the guess late eighties, don't hold me the exact date when then, when treasuries were yielding eight and the pension plans had about a five percent return projection eight percent for bonds, five percent projection for pensions. And now treasurers are yielding two and a half or three depending on whatever you take, and

engines are yielding seven. And I think it is almost a given that it will end badly, Mr Boggle, Do you believe that artificial intelligence and robo advisors will do away with the human touch when it comes to investment advice, Well, they will do away with some of it. Uh but but but what's what's happening mostly in then the robo area is they're using conventional index funds like the S and P five hundred Bangardis and P five hundered. I think that's the largest investment at the betterment m or

and maybe maybe some of the others. So they're they're just it's that they've been doing so far mostly asset allocation, and there's no harm done in that. Their asset allocation looks very much like you know, sort of a sixt thing generally up or down, maybe with a age or or aggressiveness of the investor. So maybe it's I think it's less art Artificial intelligence than asset allocation is a simple matter. You don't have to beat it to death

with data. As for artificial intelligence out there, I read somewhere that people that are trained in artificial intelligence in college, after a couple of years gonna make a half million dollars a year, And I think that's wonderful. But I keep wondering how much people that have real intelligence will make. Now was Jack Bogel. He is the founder and retired chief executive of the Vanguard Group and the author of Common Sense on Mutual Funds, New Imperatives for the Intelligent Investor.

I'm pim Fox along with Lisa Bramo wits This is Bloomberg. Protests are breaking out in Gaza, Turkey, Germany over President Trump's decision to move the US embassy in Israel to Jerusalem, recognizing that as the capital. This, of course the subject of a longstanding debate and controversy in the region, given the tensions between the Israelis and the Palestinians. Here to

talk about it is Daniel Gordis. He is a Bloomberg View columnist as well as a senior vice president and court Distinguished Fellow at shell M College in Jerusalem, and he joins us now, Daniel, thank you so much. What is it? Just to start with, what's the mood like? There is there an increased kind of tension and expectation of violence around UH President Trump's decision. It's an interesting question.

I think that yesterday, in the advance of the declaration and immediately after, there was a pretty widespread sense here that if there was any violence, it was going to be pretty sporadic and it would pretty much peter out relatively quickly. I think people are a little bit less confident about that right now. I don't think that anybody is quite panicking yet. But there have been there have been conflicts all along the border between Israel and the

West Bank UM. According to the his reports, several dozen Palestinians have been injured. I haven't read of any deaths, and I haven't read of any injuries on the side of the israelis UM. But colleague of mine who was working from home today, who works in Maldumim, which is UH inside the West Bank. It's a city that's very much controversial because it's gone on an extension of Jerusalem into the West Bank. She told me that the city was ringed with security people, that they were just making

sure that people did not get into the city. So I thought my senses and we heard, by the way, helicopter is all in the sky this afternoon. So it may be materializing into a little bit more violence than some people had expected. But there's certainly no panic on

the streets and no panic. And as people are talking, Daniel Gordis, you know in your good book Israel, a Concise History of a Nation Reborn, you talk about the role that Jerusalem plays in the history of the region and specifically in the founding of the state of Israel. I'm wondering if you could just provide us with some context for Jerusalem, not only as a geographic location, but

as a political location. Right. So, Jerusalem was not included actually in the borders that the United Nations gave to Israel, and that very famous photo of November nineteen seven, when the UN General Assembly created a Jewish state and an Arab state, Jerusalem is going to be a kind of an internationally monitored area. The Israelis were very unhappy with that because they wanted Jerusalem to be their capital, but

they accepted the UN deal. Uh. The Arabs, of course did not accept the deal, launched the war, and in the course of that war, Israel captured West Jerusalem. It did not capture East Jerusalem, which it did not get until the nineteen sixty seven war when Jordan's despite pleas from the Israeli government, decided to enter that war as well. So Israel has always since nineteen forty nine recognized West Jerusalem as its capital and as one of the rest

of the world to recognize it. It's the only country in the world that other countries don't recognize its capital as its capital. When Israelis are always scratching their heads saying West Jerusalem is clearly not going back. So why can't the west of the role just acknowledge West Jerusalem as the capital of Israel and Easter Rusalaman will get resolved when the result, when the situation where the Palestinians

gets resolved. Um. And so I think that you know, from a from a religious standpoint, it's very important to Jews, it's very important to Moslims, it's very important to Christians. But this is what you correctly plant on there's nothing to do with the religious issus. It's all about politics. And I think what the President did yesterday was basically to say, and he said it himself, you just a

matter of recognizing reality. I mean, as he pointed out, the Supreme Court is here, the Parliament is here, the President lives here, the Prime Minister lives here, the vast majority of government offices are here. Always basically saying is that what we're gonna do is stop capitulating to the fear of violence, and we're gonna call reality what it is, which is that West Jerusalem is the capital of Israel. Well here, here's just just to push back on that.

I mean, a lot of people are saying that this move by President Trump has undermined a US role in the peace prod, says has inflamed tensions. Uh Hamas has called for an antifata against Israel this morning, and you have to wonder, at what point is it worth it, I mean, just for to make a political statement. Well, that's a great question. So first of all, obviously if this blows up into a major conflagration, uh, then one could very reasonably ask whether it was worth it or not.

I think most people who are still banking on the idea because it doesn't actually change any reality on the ground. Most people are banking on the idea that it's not going to become a major conflagration. But you're right, if this gets out of hand, then the question of whether it's worth it is certainly a very good question. I think that in terms of, you know, the question of whether or not the president has really kind of moved the United States out of being a legitimate arbiter in

the in the process. I mean, first, well, let's remember that, you know, countless presidents, Republicans and Democrats alike, have seen the United States as an important arbiter and has gotten us nowhere. And I'm speaking as someone who was in favor of the creation of a Palestinian state, as someone who's not a huge fan of the current president. But I think that what he said was, uh, you know,

basically true. We haven't we have we as America have not been able to move this process forward and and sort of capitulating to this Palestinian demand that we not acknowledge West Jerusalem as the capital of Israel has gotten us nowhere. So since it has gotten us nowhere, let's at least call reality on the ground where it is. That's my sense, but obviously reasonable minds cannon do differ, and there are both Disraeli leaders and as well as

American Jewige leaders on both sides of this divide. Daniel, what has been the reaction, if any, in Arab capitals around the region, and is the status of Jerusalem as important to them now as it once was. Perhaps the reaction is exactly what you'd expect. They're all decrying it and saying it's a terrible idea, and so farth that's part of the sort of the ritual that has to

get played here. I think the much deeper issue, and it's a sad one for the Palestinians, quite frankly, is that the Palestinian issue was simply not nearly as important to the Arab world as the palest Indians wish it would be, and it's not as important to the Arab world as it once was. I mean, take Saudi Arabia for example, which did speak out because that's what it has to do, but Suni Arabia doesn't care one little bit.

Sni Arab was worried about Iran and it needs American and Israeli cooperation on the Iranian on the Irmanian issues. So they'll speak out today, they make sure that they can, you know, sort of make a check mark next do we spoke out against it. But Saudi Arabia couldn't care less. Egypt has completely suppressed Palestinian protests in the streets over the last few years under LCC. So Egypt's not a

big help over the course of the years. Even when Saidat and Manacha began negotiated the return of the Sinai, said Dot insisted that if he was going to get the sign I back and sign a deal with Israel, Israel also not to create a Palestinian state, and began said no, And so that's where we are. Daniel gordis Bloomberg View, Colamus, thank you very much. He's also the author of Israel, A Concise History of a Nation. Reborn the founder, one of the co founders and the head

of a Carlisle Group, the private equity firm. David Rubinstein was talking about infrastructure yesterday. He said that he hoped Congress would have passed an infrastructure bill by now. Well, let's find out about why that hasn't happened. Perhaps and what could be done to move this along. We have an expert when it comes to infrastructure. Bill Sandbrook is the chief executive of the US Concrete and he joins us here in our leven three oh studios. Bill, thank

you very much for it coming in. So what would you say to someone like David Rubinstein? He says, Look, he says, you've got low rates, But most of the US infrastructure is state and local, it is not federal. Why can't we get infrastructure done? No, it's a very

good question. We were very hopeful people in our industry, and obviously both parties had platforms that advocated a trillion dollar spend before either winner was announced, and in fact, at President Trump's inauguration, the second thing he mentioned was one of his top was his top priority was infrastructure spent.

And we have been disappointed that it hasn't been more forthcoming. However, having said that, there were priorities that need to be chosen, and the priorities were health regulatory reform, healthcare reform, taxes, and then infrastructure came forth, and there were fourth because and there were reasons for that sequence. So I'm patient this problem has not developed overnight. This problem is not

going to be fixed overnight. So if it's pushed a year or a number of months, as it looks like it's going to be pushed into next year, I'm not despondent about that. The needs continue to grow and I think the federal government's going to have to address it one way or another. And there is by parts and support for it bill. Do you have a sense of how it would take place, how big it would be, as well as where the money would go. Would it

go to projects that would apply uh for funding? Would it go to public private kind of partnerships that we then invest in. What's your sense it's gonna be a combination of of all the above. The public private partnerships are one piece of it. And if you remember is this has transpired, the administration was really hanging the hat on that that would be the lynchpin of any further any additional spend or increased spending. That has moderated to

some extent, there is talk about gas tax increases. At least the administration doesn't have them dead on arrival. It does come down to funding eventually, funding and priorities. There is a list of fifty top priority infrastructure projects in the country that the governors developed and has been put to the Secretary of Transportation. One critical one. It's the Gateway project that links new work in New York City

with a new tunnel, a new rail tunnel and whatnot. UM. I think over time these things are going to happen. The devil's in the details of funding. And it's been like that since, so no change there. You know, you've been on a little bit of an acquisition trail, and I'm wondering if you could describe what you've done, particularly in California, but also why why acquire rather than building? That kind of highlights this idea of trying to get the permits and trying to deal with local and you know,

state municipalace on in order to make you business. You know, it's a very insightful question. Both coasts California particularly, it's very difficult to get through any environmental permitting process for whether it be an infrastructure project like a road, an airport, or an industrial manufacturing facility. We operate in heavily urbanized environments where permitting is extremely difficult UM. And to that end, we just made an acquisition on November seventeenth, Polaris Material

is a big quarry in Canada. Because California arrogates are being depleted rapidly and there are no new quarries coming online. Therefore, the cost of arrogates are becoming ever expensive. We had an opportunity to buy this quarry and ship arrogates down into our facilities in San Francisco so we can be self sufficient. It helps our profitability. Uh and and as well, we got a terminal in in Los Angeles because we are growing through acquisition and expansion, which now gives us

a beachhead into consolidate in the Los Angeles market. Considering that you made a purchase in Canada, it's important to look at what the trade relationship will be with the US and Canada and elsewhere. And I'm just wondering, have the increased tensions around trade affected you at all? Do you expect them to affect you? Do you think that they have been overblown? Now? I think they're they're valid.

I don't expect them to impact arrogance. Arrogates have been shipped on both coasts from Canada because of the the inability to get new permits in the New York area, for instance, or in California. The arrogates have to come from somewhere. Um, they're very expensive to travel by truck, long distances from inland, so that sheer economics of it will underpin the ability of it long term. I'm not overly word about free trade, the Canadian Trade Pact as

it relates to arrogance. Talk about the raising money, whether it's in the debt markets, you don't have a lot of that. I think about six million in total. Uh, easy to access money right now, I mean people throwing money at you to say, g you know, we're looking for yields, so why don't you borrow someone go out and buy a bunch of Yeah, that's that's very interesting. Uh. We've been very successful over the last six years with

our strategy. With success comes the the benefits of having people want to loan your money so you can continue to be successful. So I think it would be easy to access at this time. Whether we would take that on as debt or equity would depend on the amount of money we need. And we are a cyclical business though, so we have to be very cognizant that the good times that we have now, you know, they won't last forever.

Despite any governmental policy. Despite our hope, construction is a cyclical business and we have to be mindful that real quick. When do you think that the cycle will start turning well with the tax reform? I continue to move that, I continue to move this out. You have to remember this has been a historically slow recovery at very low rates, which is act think good because we're preventing new new peaks and new bubbles, and the extent it continues at

this gradual pace. I think the tax reform is going to extend in another two years. I'm looking into two. But that's I'm not a I'm not a clairvoyant. Well you'll have to I'll pull out by Christo Ball and you can try your hand. Bill Sandbrook, thank you so much for joining us. Bill sandbrooks CEO of US Concrete here talking about the infrastructure plans that are evidently in the works. We just are going to have to wait to see them. A Lisa brom WIT's along with pim Fox,

this is Bloomberg. Individual investors are plowing their money into US stocks at a record pace, at least by one measure, raising a big question are they coming in too late when the stocks are too valuable and are destined to cool off. Here to answer that question is Randy Frederick. He is vice president of Trading Undervatives for the Schwab Center for Financial Research, which is based in Austin, but

he joins us here in our eleven three oh studios. Randy, um, are you concerned about the flood of retail cash and just sort of the general increase and allocations to US equities? Not yet? So the question is are they coming in too late? I would say they're coming in late in the game, but it's probably not too late. I would say. For the first eight years of this bullmarket, the big question that I got at all the client events I got and my counterparts heard the same thing, was what's

the next shoe to drop? When is this all going to in? What's going to cause the max ash. It's only been within about the last quarter, last three or four months that we've actually seen a shift and investor sentiment to, oh, this rally is legitimate. This bullmarket does have some legs, and part of that, I think is that we've got an incredibly solid fundamental backdrop and we frankly think that's going to continue at least into the

first half of next year. Doesn't worry you that now you've got people who were bearished turning bullish to some extent. It does what. It doesn't mean we're at the end. It may mean that we're at the very beginning stages of what could end up being the end, but the

end could well be a year into the future. And in fact, historically, when you start to see all of the even the most ardent skeptics come into the market, it may be the sign of the beginning, but many times that has lasted more than a year, maybe even a year and a half to two years after that. So it does have some sort of assignment. It does definitely does not point to a top just yet. All right, I want to ask you about something that we met we report on on a regular basis, and this has

to do with the VIX, the volatility index. Does this really matter anymore to people still use the options that are linked to the VIX in order to speculate, or has this become an indicator whose time is kind of come and gone. Well, so, I've been studying the VIX ever since first and came out in fact that it was it was created the month before I started working with Charles Schwaback in so I've been and being involved in derivatives and and volatility and all these things. I've

sort of been studying it every day since then. So yes, I think it still matters because what it really tells us, and this is where the problem comes in, I think with retail investors and some of these products that are allegedly linked to the VIX, is that it really tells you how much the institutional funds are hedging a large market downturn, and the fact that we've had historically low levels of the VIX forty five days I think it is that we've closed below ten this year, where right

now just ten point one five roundheard of. It just simply means that those who run the big institutional hedge funds are not concerned of a major downturn. That doesn't mean we couldn't get a five percent pullback, and frankly,

that might even be a healthy thing. But the problem with investors who trade or spec layers who trade products linked to the VIX, whether it's vixed futures, VIX options or even a VIX ct F E t in is that they think it's tied directly to the VIX index, and they don't really understand in most cases that is actually tied to vixed futures, which don't move nearly as

much as the VIX. So unfortunately, I when I often caution investors about this when I speak at seminars, is you shouldn't spend all of your time trying to predict when the next big VIX spike will happen, because it's very, very difficult to do. Instead, wait until the VIX happens and then take a position that can benefit when the VIX comes back down, because we see the VIX come

back down every time. It's bikes pretty much. So, given your experience with derivatives, let's talk about one that's gotten a lot of attention. It's gonna start trading on Sunday. It's the Bitcoin futures contract. It's come under a lot of criticism by a number of big firms. I worried, are you about this? Well? I think it's again it's definitely a speculative instrument. It's something that we're keeping an eye on at Charles Schwab. We we don't aren't prepared

to make any changes at this point. Um. I think what has been driving the bitcoin price, and the reason it's we've seen such a dramatic rise, not just this year it's but in just really the last few weeks is the introduction of the VIX futures. I think those who own I'm sorry, of bitcoin futures. Those who own bitcoin, I believe think that that if futures are launched and it provides the avenue for many more investors to get into bitcoin than who are currently in it, that it

will likely drive the price higher. That may or may not be the case, but I think that's what what may be driving the price of bitcoin right now. All right, as you are an expert in the world of trading and derivatives, have you seen a convergence between futures and options because they used to be pretty separate in terms of the way you would position of portfolio and as a manager, you wouldn't necessarily mix the two. But that

line seems to have been blurred completely. Well. Back in the old days, futurest firms were separate and unique in most cases from regular brokerage firms that would typically trade stocks ETFs options, but the futures business was kind of separate. What happened in many cases and and Charles Schwab is a good example of that is that firms that were traditionally stock and option and mutual fund brokers have also

acquired or gotten into the futures business. We acquired a company called Options Express, with most people know, we recently finished the final integration and so futures is a part of our product mix and it's become a much more broadly accepted product to mainstream investors, where in the old

days it really wasn't in it. I think it was the introduction this probably goes back maybe almost ten to fifteen years, the introduction of the mini stized contracts, which really made futures um accessible to We didn't have to put a huge amounts of collateral and with the many size contracts that's no longer necessary. So that made it really much more acceptable and and really um attainable product. If you will, to a retail investor, do you watch

the volume levels? Do you watch the interest level that customers expressed by using that that platform. At schwap, certainly we do um. We don't publish those numbers. We try to group them all together with our trading ball milliames. But I will say that one thing that has limited to some extent the growth and futures to retail investors. Is also the introduction of many, many E t f s and e t n s that have access to

the futures market. So those who don't want to provide that ability to trade futures directly can get access to that through their regular equity positions using e t n s and e t f So I think to some extent that has cannibalized a bit of the futures business. All right, well, well done, Thank you very much for

being with us. Randy Frederick, vice president of Trading and Derivatives for the Schwab Center for Financial Research based in Austin, Texas, and you can follow Randy on Twitter at Randy A. Frederick and that's F R E D E R I C K. Thank you very much for being here. Looking forward to, of course, so speaking with you in the future. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,

or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bluebirg Radio