Vanguard's Joe Davis Discusses Global Economics (Podcast)

We talk about the trade in ideas and the global exchange of technology and how things like the Internet have allowed the entire world to become richer, more productive, lowering certain um negative aspects of economic growth, and really helping to raise up the entire world economy and world standard of living. This is a fascinating, wonky conversation that I think you will find absolutely intriguing. So, with no further ado, my conversation with the Vanguard Groups Joe Davis. My special

guest this week is Joe Davis. He is a principal at Vanguard and is the firm's chief economist as well as the global head of the Vanguard Investment Strategy Group. He's also a member of the senior portfolio management team up for Vanguard's fixed income group. Joe Davis, Welcome to Bloomberg. Thanks Barry here. So I've been looking forward to having this conversation with you because there are so many things I want to go over with you about the state

of the economy and indexing and Vanguard. Tell us how you found your way to Vanguard. It turns out you were born very close to the Vanguard headquarters, so I grew up literally ten minutes from Vanguard's building. I never thought I would end up working at Vanguard. Uh, Like a lot of things in life, I have my parents the think for why I'm actually at Vanguard. So I'm coming out of grad school do my own job search.

You know, I'm thirty one years old, So of course I thought I knew everything, and you went to grad school and duke okay, So I really wanted to go to the private sector, not in academia. And I thought I was going up to to New York City to work on the South Side, And my dad pulls me aside and says, hey, have you ever thought about applying to to Vanguard. So, of course, again, I'm thirty one

I say, what Vanguard, that index company? They don't need an economists and uh, he says, well, do you mind if I take you your resume and give it to someone over there, And turns out they were just starting a research group to supplement uh Jack Bogel, who was obviously continued to be a luminary in the field, and uh I was. And so next you know, I'm interviewing a Vanguard's two thousand and two, and uh I was to this day. I was impressed with the talent of

the professionals. I'm at a Vanguard with with with no egos and s And that's then. That's over fifteen years ago, Barry. That's quite intriguing. So as I was preparing some standard economic questions to talk to you about the Federal Reserve and the yield curve and everybody's favorite indicators, I came across a conversation that you had recently where your thirteen year old daughter asked you the question, Hey, Dad, is the world getting any better? That's kind of fascinating from

a thirteen year old. But my question for you is what was your answer? Well, you know what, my my instinct was. It depends and that's of course that's not that's not satisfactory, UM, but his standard economic response. You know, my my daughter really got me thinking. I remember sitting in the kitchen table Barry, and I said to myself, you know, I should know the answer to this question pretty quickly, and I'm gonna fail seventh grade because that

was the question to a seven great essay. UM that end up becoming a whole research project because we're I zeroed in on, uh, is if the world's getting if the world is going to get better, that means the rate of innovation what we call the rate of productivity, has to has to accelerate. And why anyone should care about that is because then the standard of living for people around the world's increasing. And we had that that rate of increase has been declining since two thousand, long

before the global financial crisis. And and so we stumbled on, you know, what is going to lead to higher rates of growth? Innovation for you know, more inclusive growth across the world, and something we didn't inspect the find we actually we believe we found what potentially is the first leading indicator for innovation that suggests just right now that innovation may and growth may accelerate five or six years

in the future. So Stephen Pinker, linguists at Harvard wrote a book, The Bitter Angels of Our Nature, and his takeaway was, well, the headlines are just worse and worse. But if you put aside the headlines and actually look at the data, UH, infant mortality, UM, nutritional UM, lack of nutrition and starvation, UH, capital crimes, war, UM. All these things have been going down. I've been going down for fifty years on a global basis. Why is it

that that is such a challenging question. Why does it not feel like things are getting better when they clearly are getting better everywhere? And I remember routing off some of those statistics, uh, you know to my daughter, Um, you know Steve's book. Hans Rosling for years also talked about that great, great example. UM. I think part of it is that those are slow moving trends, so we just don't fixate on them because they're not moving up and down very quickly. Um. Those are years and yeah,

years and decades. The other thing is, I I listen, I I can't prove this beare I think part of this is happiness is relative in life, Right, there's a lot of well rout it depends the relative to you know, so it's out to your people. I think you can explain the paradox have said, you have, you know, general trends in the world. A lot of trends are better, lower violence, UH, increased wealth around the world. Look what's happened in China. Yeah, you have rise in income inequality.

So that's where you can you can you can. I think you can reconcile with some of this paradox by saying that's where the relative matters as much as the absolute. I don't that's what I justify that position, but I think that has been lost sighted. But the fact is, I think in the financial markets and as investors, we focus more on UH corporate earnings growth those economic fundamentals that perhaps me fall outside of GDP. So let's talk

about the productivity issue that you you mentioned. I so I work in a space where productivity has been exploding and so on a relative basis To answer to respond to what you said earlier, it seems to me like productivity growth is booming. Why do we not see productivity growth throughout the whole economy? And is that a measurement issue or is it a genuine lack of productivity problem. Yeah,

I think that there's there's three potential reasons why. And again we should care because if proactivity is really going to return, Bob Gordon's got that great book, The Rise and Fall of American Growth, And you know, other than the late nineties, we haven't seen a material pick up in in proactivity. And again it feels all around us very right, I mean, technological disruption, innovation, technology. It seems like you should be there. So when it could be mismeasured,

I don't buy that argument. We've looked at some of it. If it's mismeasured, it's second order. I mean GDP and those short of statistics have always been mismeasured. Um. And I've done a lot of economic historical work to to to just you know, to to justify that that that position. Secondly, um, is that it's were permanently. There's some making the argument, some really smart people that I respect, making the argument. I mean, you hear it in phrases of secular stagnation.

You hear it. Of all, ideas are harder to come by, that that proactivity is permanently impaired. I don't buy that either. The third one is I believe that um, that there's an implementation phase that that the global economy is working through again demographics acide. I'm talking about output per person, income per person um that we will see material rise in productivity. I can't tell you that the day or the week, Barry, but our our work some what we've

done we can get into. We call the idea multiplier. We believe is the world's first leading indicator of commercial innovation that actually will show up on statistics. And we believe that that is in the process of occurring, um. But it's going to take a little bit of time. And again that there's an historical analogy to this. In the past two periods in long u s history over two years, there was two periods in time at least when productivity is as low as it is today, in

a period of profound technological disruption. It happened during the mid nineteenth century when steam engines and locomotives were explaining across the economy. But there was a ten of fifteen year period after a financial crisis, ironically, when when growth and productivity was at a standstill, and yet investment in new technology was starting to pick up. So how much of an impact does the financial crisis have on either

actual innovation or the measurement of innovation in the following decade. Well, I believe in in in some of the work we've done shows that most industrial revolutions, we can debate whether there's been two, three, or four UM, they generally have two broad phases. The first one is the first u

fouria that can last ten or twenty years. That's when the first technology that the general purpose technology, steam engine, electricity, the computer, when it's it's it's it's built and it's introduced to the marketplace, think of routers and and and hardware in the late nineties. That's the first phase. That typically then happens a period of euphoria with that financial bubbles,

there's economic damage. UM. What I think is lost though the more powerful phases the second phase, because what general purpose technology changes the world when it changes business models and it changes how companies do things that have nothing to do with the original technology. And that's where UM some call it now AI artificial intelligence. It's just effectively computer software at a more advanced pace, that is the

more profound pace. And I think we're starting to enter that UM and so that's where we will see the productivity gains is is all the other occupations and industries across the country using that sort of computer technology. Quite fascinating. Uh, Let's talk a little bit about innovation and creativity. Following the dot com bust, you began hunting for a formula to determine what it is that drives innovation in the world as well as human creativity. You called it the

ideas multiplier. To discuss that research, Well, we were, you know, we we were trying to answer the fundamental question Barry. And again we've we've we fully answered it, but we I think we have better insight into explaining this paradocks in the world low productivity and measure rates of innovation. Yeah,

we got technological disruption all around us. And where our research lead us is to say what ultimately leads to uh, profound increases in economic growth, whether it's in China the US, it's that genuine rate of innovation, right, And and what we did is we looked at say, well, if if if prota it's low or high. Ultimately what that means is the the the amount or the number of valuable

ideas being created world. Ideas for a new widget, new computer, new business model, new product, that has to be the pressed now. Um, and if we can, if we can look at what is occurring in the world and the globalization the trade of ideas across countries, then we can get a sense of where the new ideas will come from, if, if, if at all, if it will they'll accelerate. So so let me try to unpack that a little bit, because

that's a really loaded multipart observation. First, my assumption has always been and new ideas bubble up constantly, and while we may not know if it's coming from Boston or San Francisco or New Delhi or Beijing, human ingenuity is constantly trying new things and putting different things together. But what you're implying is new ideas EBB and flow in a cycle of sorts. Yeah, I mean, even it's a

fashionating there's like long waves. Now, you can smooth any time series and you can find this but long raise of innovation through time. In fact, in the United States, we've had at least nine periods when productivity on a ten year basis has been zero really ten you now, just because it's it's been zero nine previous times. Doesn't mean we're gonna rebound out of this one, because that's

where we're at in the previous ten years. Zero. Now, when you say zero productivity on a trailing basis right on,

I'm talking to trend forget that. So what happens is there's a giant drop in productivity because of all the job to myself included, you know I did to Going back to my daughter's question, I have a good answer because economists generally treat the productivity as a residual, meaning we don't really know what what why it goes up and down through time because ultimately it leads to where our new ideas coming from. So how do you how

do you answer where new ideas are coming from? So what we started looking at is what drives when the rates of idea creation accelerate and decelerate through time. And what we did is is we actually we actually traced the creation of every valuable idea in the world over the past forty years. It was over two billion records. And what I mean by that is we care not just by about some idea being created, because there's a lot of quite frank, a lot of bad ideas. We

want to care about. Can we trace the spawning and spreading of valuable ideas, think of things like the Internet, but things that even are smaller in scale, which create new businesses, new opportunities. And we looked around the world and what we found is actually the most powerful part of globalization, because globalization is on their attack with trade,

is the rate of ideas. Right, the fact that there's more knowledge and ideas being created in China, which is actually now leading to further additional ideas in the United States and vice versa. And so what we found is uh that that is what we call the idea multiplier. How many future ideas are created by one good idea in that ratio was roughly forty two one one. It picked up in it actually told us, had we had the data back, that there was something coming five years

later in the computer industry. It was called now the Internet. Because the rate of ideas and being discussed in academia and patent applications in academic research, which is the signals that's where the data we were using two billion records.

You could see that sort of high energy state in those fields, and it's been dormant for the past ten years, which I think helps to rectify some of this what some call the new normal is because the rate of new influential ideas commercial ideas has kind of plateaued around twos to one, and you're and you're suggesting that this is cyclical and temporary and down the road. Well, what we just picked up is so the data and we

were I was shocked to find. In fact, we had the team crunch at four different times um a lot of that. What we found is now just in the past year, that idea multiplier went from two hundred to one to over four hundred to one. So, in other words, this is now starting to leading indicator that this idea multiplier, when you look at its rate of change, tends to lead actual productivity growth four or five years in the future.

I know it sounds crazy, but the ideas that we're tracing in our leading indicator, our ideas in academic research, medical research, it's patent applications and how they're being cited. Every journal and every book that has ever been written over the past forty years. We look at all those ideas, and not only that, all the citations of all that research and what ideas they are citing. And when you look at all that data. You can then identify what

are influential ideas that are spreading. And what we found, to my shock, is that there was five fields we've found out that have the higher idea multiplier than what the computer technology industry had. In those five are in order. One is around materials. It may have to do with batteries. It couldn't, So I can't batteries. I can't. I cannot tell you what game changing ideas will occur, but I can we can have some sense of where the fields are.

Just just look here in Manhattan. There are now high rises that are these tiny skinny pencil bigger than the Empire State building. The only reason that exists is the technology for the spines of those buildings. It's no longer steel. It's a form of carbon graphite, the carbon file that you can make lighter and smaller and stronger. You couldn't have built that. So I tell my daughters the three leads that, so it's three jumped again. I have a

higher idea multiplier today than computers did. Material science, material sciences. One second is that actually I'll give you four second is actually oncology. The funny enough cancer, incredible progress. Um, that's encouraging for my personal So we will be cancer in our lifetime. Is that that I don't know, I don't know, I know, yeah, yeah, I would not say that. The third is actually around agriculture, plant sciences increasing yield,

increasing that again we you know we I don't. I'm not good enough or smart to tell you exactly what new product will come out, but there's something big in the pipeline. A few years ago, Monsanto patented the ability to create rice that was salt water resistant. So if you're in parts of let's call India and Pakistan and Malaysia where it's the staple crop, but there are frequent floodings which can destroy regular most crops are sensitive to salt.

This is so fascinating. And then the largest one that has by far the highest multiplier is is genetics and genomics research. Really yeah, I mean it's often makes sense, but it's off the chart. I mean, it's it's over two x where computers were again just a you know, relative comparison, because what's an idea multiplier? Again, we're introducing

new concepts in this debate. It's effectively you know that that's in gine next and ironically, did you see how I'm I did not mention AI in any of the fields. You did not. That's correct, because what's happening is AI is incredibly important. I'll call it Brawley computer technology, digital technology. They are being used by all these industries. That's a general purpose technology. The ultimate new game change on ideas will come out, I believe from one of those and

not more of those fields I just mentioned. But they perhaps could not have come up with some of those answer applications without computer. Probably we probably couldn't perhaps do this podcast without the computer and soft technology that you have today. We could. It would just be two people having a cup of coffee. That's what the technology allows us to do. So I have to ask you a question about one of those titles, Global Head of Vanguard

Investment Strategy. What does this group? What does it do? Why does Vanguard have a global head of Investment Strategy? And thanks Perry ultimately thought leadership. So our job, the Investment Strategy Group's job. It's a group in in existence roughly fifteen years. Um, it's actually the group I was hired into. And um, you know, our job is to is to help investors be successful and help them, UH, provide them with the perspective on the problems they're trying

to solve. So if it is what is Vanguard think dot dot dot And if the next word or phrases what's our view on the long term trends in the economy and what are reasonable expected returns? That would be Investment Strategy group. If it would be on what are viable retirement income and UH an investor behavior concerns and issues, UH, this would be that group. It would be what's the role of an asset or SEBASTA class factors commodity of

what's that role in the portfolio. We would help through research as well as computer analytics UH to help investors or our internal business partners, those that provide advice, those that provide counsel to advisors, institutions, or individual investors. We would help them through the research that we conduct. So we're ultimately a research arm of the company UM, but increasingly doing a lot through computer development as well as

speaking the clients UH and prospects on the road. So what I'm not hearing in the list of things that this group does is you're not forecasting the economy. You're not forecasting the market. You're not making recommendations to rotate out of this sector into a different sector. Not unexpected

from the Vanguard group. Who what is it about two thirds of the assets of Broadly invest I'll I'll tell you when I when I first came to Vanguard, and I'll never forget the question was why does Vanguard need an economist? It's still a good question I get asked. So I think ultimately because um, for two reasons. One is ultimately, asset allocation, which we all know is the

most important decision any investor has to make. Ultimately is a function of the expected returns and volatilities you assume for that portfolio. Now, you can use long run history, but why should you do it? Our themes different? Uh Um. Secondly, so that's important, and so how do you think through forming the sort of viable return and risk expectations. I think the job of our our our team is to

help do that in a reasonable way. And secondly is to convey the risk in the marketplace to help investors make decisions on their uncertainty. I'm very proud of our framework. You know, we refuse to release short term point forecast. I we we have a mantra At Vanguard we will shall not produce point forecast. We can produce forecast. I think that's helpful if we show the range of distributions.

Our job is too in a very statistical, rigorous way, what is the range of expected returns or outcomes for the markets, for the economy, for the assets that we care about. But that probabilistic approach is very different than so really the question isn't what does Vanguard have an economist the chief economist? Really the question is how is Vanguard's chief economists different from the typical chief economists and

its Wall Street firms? Because that's really and I and I respect many of my colleagues, Um, you know, I read their research. I'd say, you know where we where we differ is is in the is in the shift of our horizon and where we focus on so we spend For example, I I tell my team we should not be spending much time trying to divine what the

latest GDP number will be. We care about it will give a high level glance, but we care more about investigating longer term trends than such as technology, globalization, demographics, debt. Why we care about that, because that ultimately change alter the trend for growth for short term interest rates, where the building block for all expected returns and the risk premiums you and I hope to harvest over our investment horizon.

So um, not to say those other exercise aren't important, but we focus much more in the longer term trends and the risk the development of China. How that's altering the relationship with the US rather than just the data flow as I call day to day, week to week. I I think you economys should not spend as much time as we do at times on on those sort of short term signals. So when you're talking about trends,

you're not talking about quarters and years. You're talking about decades long, secular trends that are very sign now to help the you know, to influence. It's just an input to our performid management team on the fixed income side, obviously their active bond managers. Our view on the Federal reserve matters, our view on growth, what's the risk of recession. We will estimate all those We don't tend to publish them in high frequency externally for clients, but it's part

of the active management process. But again it's all in that distributional setting not talked to you before, Barry. We're trying to and this is just as hard the one question. One one problem is not easier solve than the others. We're just trying to focus if we can now the sort of trend and have better sense. I'll give you an example. For ten years, we have not been concerned of a rapid increasing core inflation in the U S

or an almost any other market. One of the reasons why we looked at the role of technology and how that is depressing. We quantified the role of tech knowledging digital computer is actually probably subtracting fifty basis points a year from core inflation. So that matters because that gets to what are reasonable expectations for the Federal Reserve, what are reasonable expectations for long term tenure or for the tenure Treasury. Again, we will never have a crystal ball.

Our job is to say what are the reson what are the factors helping to drive these longer term trends. And I'm proud of you know. That's where our marginal hour, our marginal dollar is spent is trying to get a glean a little bit more inside and as longer terms. So let's stay with the longer term trend with inflation deflationary forces such as UM manufacturing economies of scale coming out of places like China but also India and Turkey

and Vietnam and elsewhere. UM. But that's offset from some of the longer term trends on things like education and healthcare, which have been way above average. How do you look at that trend and what does that do to the overall inflation picture and and everything else? So I think two things. One thing that's been in statistically we could

you know, I could show you it's irony. One of the reasons why inflation it's although possible, is unlikely to rise maturally in urin eyes lifetime, is because you and I and everyone else in the marketplace believes that it won't. It's inflationd So economists generally talk about anchored inflation expectations really surround us, Like how anchored inflation expectations? Right? It's the tips markets breaking inflation. Central bankers will use well

anchored inflation expectations. Really, what this matters is is that we we believe that we believe in the federal reserves credibility and achieving a roughly two percent, and so inflation expectations matter, which means it's less likely to core inflation to go above it or blow it. And now you overlay that with the trends and technology, and we have long believed that generating two percent inflation in a digital

world it's just tougher to do. Is it possible? Clearly if you go to Argentina, very easy to get well, but there's a but that's because they have very poor inflation psychology, and so Japan of anything they have yet is this day to break that negative or low inflation psychology. The federal reserves to their credit, and I think Americans as a as a marketplace, we've generally zero didn't on that two So putting aside the hyper inflation in Venezuela

and the deflation in Japan. Um, and let's talk about the challenge of reaching two percent in places like Europe in America. What does this tell us about wages going forward? We've had thirty years of fairly flat net of inflation, thirty years of flat real wage gains. What what can workers expect going forward? Well, I think modest, you know, modest increases, which the thing is a positive I think I'm you know, two things I'd say about wages. One

is wage growth. Let's say the US example, we are where we should be because at the end of the day, wage growth should be roughly the rate of productivity, which you and I just spoke about today's just kind of kind of low, and inflation which is also called low. Now, I would say that I think way growth will continue to mostly inch higher, and I think it's a positive. And there's always the risk es central banks overreact that

will not lead to material rising core inflation. The wages can go up, I think I'll see a lot in the marketplace. Associate if if wages should pick up further, take go from three to four percent, all core inflation defends behind the curve. That's a that's a mistake in our mind because we believe that inflation, not wages inflation are anchored and so uh, you know, we believe the FED won't make necessary that mistake and overtighten in that. So that would be good news, I think, you know,

but I think we're going to live in this. There's several paradoxes in the world. One is low growth before employment. Secondly is tight labor markets. Yet low inflation, low growth, full employment, tight labor market, low inflation. But I'm hop so I think we can get from three to three and a half percent wage growth. If we're hoping for much higher wage growth, we need to see that productivity boom, you know, four or five years out, perhaps accelerate earlier

for us to more sustained growth. So you're describing a little bit of a Goldilocks scenario as much as do well. But let's let's let's take that apart, because my pal Arry Cudlow would be all over, hey, we have full employment, but no inflation. Wage growth is starting to tick up, but not so much as to force the fence hands.

How long can those set of inputs continue into the you know, I think unfortunately, I think it may it may take a recession before we get some sort of you know, the pickup and automation you know, um productivity that I think we started to pick up. Because again, this is a signal that's five years out, believe or not. Um, Listen, I think we're gonna have a period where, you know, to this day, you know, our are guarded return out. Look, we've had that for two or three years. We have

we haven't been the only firm. Unfortunately, it may take a bear market to get this to get us out of this low expected return orbit. And that's no pain, no, it's no pain, no game. We were talking about the in a positive environment we've been in with full employment and low inflation and modest wage growth, Which brings us to the question of the Federal Reserve. Given all that, do they need to keep tightening or normalizing interest rates or are they about where they should be? I think

there about where they should be. You know, we've had a longstanding view, Barry, in part because of how we diagnosed, um, where inflation was going to go, that the Federal Reserve would be hard pressed to ever get above three percent. And we're not like super bars on the economy, and we'll just start diagnosed with the other trends, and um, we thought four rate hikes and twenty eight team was

was likely. I think that because of the vigor of the labor market, we went into the year expecting to rate hikes that would get them just below three percent in that range. We've actually backed off that given the volatility we've seen and so so we we were expecting to when we first published would brings us up to where three yeah, where we're close, and we a it breaks to two and two and three quarters, right, So we're still low by historical standards. But what matters is

the real rate, not not the nominal um. I think they're the bias shifts towards them cutting rates, not because they made a mistake per se. But uh, you know, I think we're still in a period of choppy performance. So it's one sense, you know, the forecast, our forecast sounds like soft landing. I've tried to ban that phrase advance guard of my colleagues because they said, even if even if the ultimate landing is soft, it's it's the air bags may drop in the plane, like it's not

gonna feel like. It's gonna feel choppy. This year, I think the economy globally will take a beating. China's growing um lower than they report and lower than they expected, and we're gonna have some chopping this here in the US. So they were a twelve percent, they've fallen into about six percent. Are leaning indicators for two years saying real feel is closer to five, which, by the way, we

do not fail with five percent in the United States. Yeah, I mean and there were they were they're you know, they're doing a tight rope, right, I mean, they are what we call this fight and retreat mode. You know, when they have softness will stimulate a little bit. But the trend is down. Part of that is good news. UM. But I think the trade uncertainties UH, you know, really damaged.

I think consumer confidence in China. Really this slowdown is different from past China slowdowns, and that the consumer UH is more at the epicenter of the slowdown. Again, we are not calling for a hard landing in China, nor a recession in the US, but when you have the two largest economies, UH set up for some weakness. UM. You know that this this nagging concern of recession. I

don't think we'll dissipate entirely this year. So let's talk a little bit about China and trade because it's such a fascinating area, especially in light of some of the pushback to globalization. I want to I want to pull a paragraph, UM out from something you had written previously. Fifteenth century China had been open to trade, and it was at a time the top economy of the world. It's navy was larger than the British Navy would be

three centuries later. Subsequently, in the Ming Dynasty, they closed off the country and there was a five hundred year decline in China's innovation. Explain well, I think you know China's history, Um, you know, really glorious history. I think as a testament UM to the power of globalization, the openness to other ideas, as well as the risk that society's face should they close their minds uh and their walls to to competition and new ideas. I mean, China

missed the Industrial Revolution because they closed off to the West. Now, if you also, I've read a lot of China history to educate myself, not having been bored in China, but I've visited there. And what you do read at the same time is you know the the West, Uh. You know is not um does not escape from criticism and how which and how we contributed or shaped some China policies in the eighteenth and nineteenth century. Right goes back

to the Opium Wars in the in the British. So UM, I think you know you're The more you read China history, the more you read two things. One is um you know their their their will as well as their belief to rise back to where they were at the leading economy in the world, the great power UM. You know, there's a line from Conspucia Confucius great quote, there shall not be two stars in the sky, nor two emperors

on earth. It's a it can be a little u nerving in today's environment between this between the US and China. I don't think it has to be as adversarial UM as as some fear UM. But I think you know, the tensions that we see um, economic, um, technology, military wise between the U. S and China, that's just I think that's gonna be with us for some time. UM.

But China UM. China has a roughly a fifteen or twenty year window to escape what what one calls the middle income trap, right to get wealthier middle average household income. They've they've they've astounded the world and their progress to mankind has never seen in recorded history of the amount and the rapidity of economic development. UM. But they're not out of the woods. I mean, I think it's been risky to discount China UM. But you know, they have

some challenges to work through. The demographic challenge that they face over the next thirty or forty years is the biggest one. Well, that single child policy is turned out, their population is gonna drop. Just think about that. Over the center. Those are the unintended consequences of that sort of social engineering Number one. But still, given how rapidly their quasi centrally planned economy has grown, is there any reason to think they can't become the dominant economic power

they happen to be. Yes, I mean, and that what I think. Here's the thing. I love how you just mentioned that, Barry, because you've you've hit on this for a long time. Um, And so I'm gonna say this as an economist, UM, I think economic growth is often for investors is focused on too much. So I could show you a chart, and we were showing this for a decade actually in the depths of two thousand and nine,

two thousand and ten. I show you a nice handy dandy chart that shows this the relationship between long run economic growth of a country and its stock returns hard There's a zero correlation. It looks like a shotgun on a page, which as an economist you kind of not like you kind of talking yourself out of a job. And I think that's important because it's like rather more than expected growth. It's the price paid for growth. It's evaluations.

That's why, Yeah, I would say market the UK, China matters. That's why, you know, even as the economic performance has been languaged at times in the US, we were very optimistic on US investment returns. You can see our first outlook in two thousand and ten. Some just we thought we we thought we'd be above average historical returns. If anything, we were too low in our distribution. We got above

the mean. UM. Now, as the economy has caught in closer to full employment every year, we've gotten more conservative and guarded and our investment returns it's because of the valuation you point to, so so good rule of thumb, markets get got in half. Not the worst time in the world to buy equities, it's it's not so. Let's circle back to the financial crisis that you mentioned. Are we still feeling the effects of that crisis today, more than ten years later. I think we are globally. I mean,

the that sort of tight grip has continues to recede. UM. I think you see it even from some investors, UM waiting for the next shooter drop. You know, the risk aversion savings. I mean, you know, some of the US probably needed. I think we got a little bit better balanced. Um. We've clearly seen it in in in the regulatory front across the various markets over the past several years. UM. You know, with every passing day, though, it kind of

recedes in the rear view mirror. UM. So we're we're not fully out the woods, but we have come a long way. So the the low growth that we've been talking about, the low productivity soft GDP UM again, is that hangover effect of the crisis or is there something else? Well, it was it was part I mean we over consumed, as you know many of your past guests have have illuminated. But again it's that's where we focused on the trend. The trend was starting the bend two thousand, two thou

and two, which why we come back to productivity. And again I don't I would hope that, Um, you know that your listeners. I don't. I do not wish or intend to be portrayed as a techno optimist. I mean, I think there are reasons to be optimistic, but you know, productivity will pick up that I that I have high conviction in UM over the next several years, and it's an environment of potentially higher growth that no one's is anticipating the same way in the mid nineties, no one

was anticipating in the late nineties. But that does not mean there's not gonna be headwinds and challenges that the the need for job training, as an example on automation for a right in the pickup an automation is significant

even if we do not have widespread job losses. I mean, there could be a very well ten years from now companies on average maybe spending more for job retraining than they will be on I T So that you know, that's the sort of thing I just you know, and that's not again it's there's cautious optimism in my in my in my council to my daughter, but it's not pollyannish. I mean, there's challenges we all face and uh, the

technology can cut both ways. So so let's stay with the concept of the advantages of the exchange of ideas in global trade. How do you square that with what we've seen in terms of the rise of popularism, the United States pulling out from TPP and the powers according a number of other UM policies and trade packs and even um the UK and Brexit, are we moving away

from globalization with it's it's certainly stalled. And if you define globalization tradition only which is fair by trade, I mean our our ideal multiplier rises above that and say, although trade does matter, it's the trade of ideas of knowledge, the exposure if I'm exposed to your idea, Barry, even if you live halfway away in the world, and that leads me to a new idea that has what has changed history Now, trade sometimes encapsulates an idea, a trade

for a new machine or product, and so you can infer knowledge. But I think we have stalled in the in the globalization of trade of goods across borders. The biggest reason for the rise in populism and related to that is the rise of income inequality, and I think a lot of academic research would show um that more of it has been driven by technology than by potentially

unfair trade practices. UM. So what that means is if the pace of technol technological change is not slowing, that means unfortunately the radar that that the level of income inequality may remain high. And so these UM, what some call populistic populism, tensions in the world may remain elevated. Uh that that had told us two years ago that like any at any election where in a country where income inequality has risen significantly, I would say the election

is going to be closer than anticipated. Shock can be shocked at the outcome. I'm not a political handicapper, but it says that we should expect surprises, UM, because I think there is UM. Again back to this, happiness can be relative. The rise of income inequality UM in a low growth environment UM, you know, has led to you know, some painful losses of some jobs opportunities, including the United States, And so I think that's something that not to lose

sight of. So rising income in equality gives gives rise to increase in populism, it can, it can, which gives rise to closer elections. And does that mean political parties carry less sway and people vote that. I don't know, you know, I wish, as I'm trying to be careful here with my statements, I wish though the political environment wasn't so um polarized. UM, you know, I I uh, you know, it's you know, it's I think it's natural,

and it's actually a healthy environment when we're debating. But if we're debating and listening, you know where I hope where you worry about is when in any in any society, forget politics for the side, any society, that we're not listening to each other and so we're talking beyond each other. And today we see the backlash effect. When you present facts to people, it just hardens their position if they

don't want to accept those facts. We have been speaking with Joe Davis a Vanguard where he is Chief Economists and wears a number of other hats. If you enjoy this conversation, we'll be sure and come back for the podcast extras. Will we keep the tape rolling and continue discussing technology, productivity, global trade and idea multipliers and what they mean for the future. We love your comments, feedback and suggestions right to us at m IB podcast at

Bloomberg dot net. You can follow me on Twitter at Rid Halts or check out my daily column at Bloomberg dot com slash Opinion. I'm Barrier Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Joe, Thank you so much for doing this I've been looking forward to having this conversation. UM. You spoke at a conference we hosted I want to say about a year ago in southern California, and you touched on some of the ideas from UM, the idea multiplier and the long

term trend of of global exchange of ideas. So I knew this was going to be a very interesting conversation. Some of the questions I didn't get to were the traditional boring economic questions, so I'm gonna skip most of those and and just ask you a couple of short economic questions that I'm kind of keep. Well, you go on as you could. You can answer them in as much depth as you like. But there I'm not asking you what do you think of GDP? I want to say, Well,

let me ask this question. What do you think are the most important economic indicators? I know people over emphasize some and under under emphasized others. What do you think are the three most important things that we should be looking I'll give you Barry, we we I genuinely believe this, and we do this. We look at all of them, right so we we for a long time, since I've been a vanguard, we use big data techniques to say, list every signal, every economic statistic, job was claimed, non

farm payroll, manufacturing is um. They all have some signal in it and noise. Think of any stock. I don't think you may necessarily look at one stock to say how's the broad market doing. So we will we look at all of them and see what is the an extract from that, what is the momentum and the common signal across the economy. Because every indicator goes through fits and starts of saying being very valuable and then not being valuable. So I'd say that that's the answer to

your questions. We look at all of them and an extract from that what are the common two or three signals that you could say this is the trend and the momentum in the economy, rather than pick any one signal. So so the flip side of that question is what do you think is the most over hyped economic indicator? Well, I think gdphasis, I think we do. I mean, I think there's a lot of accounting regulators. I mean there's

you know, GDP. GDP can can accelerate for a time just because businesses are are have slowed their growth and inventories are building, right, there's a little bit of being counting to it. Again, it's valuable to have came out of even war planning, you know, decades ago. Yeah, yeah, yeah, the decades is going to actually government officials did not know what the economy was producing and so to track that. Um so a great, great development, but has its limitations.

I mean, if I was going to focus on on one at the end of the day, it's it's job growth. If you and I running a business to add a new worker, to let worker go, that that's uh, that's a significant investment of corporate American costs, uh cost structure. So job growth is probably the most meaningful. What about yield curve? We heard a whole lot of yelling and screaming when the two and the five year briefly inverted, not the traditional two and ten year How do you

look at the yeld curve? But and again you know, a van grd and just we got statistics on our back at our back saying of listen, I believe there's a portfolio of indicators you should look at whether you're trying to divide the future returns of the stock market, probability, recession,

odds of a bear market. Um. But that said, if I was going to pick one indicator to to say are we going into recession on it is the Yeld curve, and it's the traditional what I would call the academic one to ten, no tens and and and three months tens months cash. That's the that's the os accurate, it's the most genuine I know. Some said, hey, the zero interest rate environment, low industrate environment is distorted. I don't

buy it. If we're you and are if we're going into a deep downturn, I imagine the tenure treasury could be a one percent and the curve is easily inverting. So I think that's the bond market has. It gives you more heads up on a downturn than the stock

market does. Now, what we've seen when at least with the two and the ten is it can give you a lead time of about a year if your memory serves the three months and the ten year similar semi, it's actually a little bit farther out right because the markets forward looking and at least past four or fifty years. Not not to blame the FED, but the FED has generally been an overly restrictive territory to tamp down inflation. Right,

So the two's have been elevated above the tens. I've exteen me above cash, you know a year out, you know, anticipating further FED tightening. At that point, perhaps the market is pricing in a quote unquote FED mistake or overly restrictive. That's the power of the yeld curve. It's not in foul bawl um. But if you were going to pick one indicator, and I wouldn't because you're reducing your odds of success. But if you did, that would be the

one that hang your hat on. So we mentioned the hangover effect that we're still feeling from the Great Financial Crisis. Let me bring this back to rates in the yield curve. Back in the late seventies, when inflation had spiked dramatically the oil UH the Arab boil embargo UH, plus the malaise of Vietnam and watergate. Then FED Chief Paul Volker

spiked rates to pick a number fift. It broke the back of inflation, and then we were looking at a thirty plus year bullmarket and bonds as rates gradually fell from there. How do you since you look at trends and momentum. How do you contextualize those two. It appears that the that trend line has been broken and the momentum is now moving in a different direction. What does that tell us about bonds and the state of the world. Well, I think you know that actually the pattern of of

bond yields. So I know, again, including Vanguard's founder Jack Bogel, rest in peace, long believer in mean reversion. Why I'm bringing this up is I think mean reversion is clearly the most powerful force in finance. It's also the most dangerous.

And I use interest rates an example, because even a Vanguard, we've had some clients you know, understandably concerned of a rapid rise in in in interest rates in bon yields because they lived through the seven from a very low, very low yes, but you know, concerns of a bond bear market. And uh, you know our analysis said that, although possible, extremely unlikely. And that's what Just because interest rates are low today doesn't mean they have to revert

to some to some average. My question is what's the danger and mean reversion is what mean are we reverting to? This is the same mistake. I we believe some investors have made over the past several years with the CAPE, the Schiller cape ratio. Nothing wrong with the sicklely Justepe ratio or the level of interest rates. But what is normal that's conditional on what are the forces that drive

those factors. So an interest rates, for example, I believe that a fair value we are fair value for long term interustrates hasn't changed in you if it's roughly three percent, so even though that's below where the seventies and eighties

average was, inflation was higher. Then So I would tell investors if you if you worry about or believe that interest rates are going to rise maturally long term interest rates, mortgage rates tend your treasurreates, you have to believe that inflation is fundamentally going to accelerate on a trend basis. So let's let's talk about the CAPE. You brought it up, going back to the early nineteen nineties. The CAPE has spent I think it's something like at the time above

its average trend. Is there no mean regression there? Or are we using and thinking about CAPE incorrectly? It doesn't seem yea, so the valuation great reach. I mean the CAPE going back to Bob Shiller, Yale and others. You know that that that that measure is formative for the whether the more stock market is fairly valued. Our issue is with investors comparing that to the long run average. So they just draw a line across their piece of paper.

The cap has been sometimes below into your point barrier, it's been generally above ever the past twenty years. Well, what's actually important is is that you actually have to control for what the what is the fair value that the market should the gravitational pull is should go to. We shouldn't always go to the same average. And so our analysis and we had a academic research published last year.

They show that you can actually significantly improve your your your likelihood of projecting five and tenure out returns significantly if you control for the level of interest rates real interest rates in the economy. In other words, when you have really low interest rates and you should have higher peed, all else equal, it's called the fair value, just like sometimes full employments at four sometimes it's at five percent.

Sometimes fair value for the U S dollars higher lowan. Now, again I do not know exactly what the fair value is, but I can tell you that the range that the stock market should gravitate towards either up towards it or down towards it. That fair value can change through time with economic conditions and trend conditions, warn't it, And that which is why only in the past year, how we

did we become more guarded on the stock market. So despite low growth environment and low interest rates, our indicators were saying that the the U S stock market was clearly undervalued in two thousand and ten, despite some saying it's a new normal and all that. On the investment side, we were saying a very high expected return premium for U S stocks that remained pretty constructive up until more recently. And only recently did the US stock market in the

CAPE ratio break above that fair value range. And again we have no predictability on next year's return, but it does have some predictability and where the stock market the average return will be over the next five or ten ures. So is there mean reversion, yes, but I think we just have to be careful what means we are reverting to, whether it's interest rates were valuations. So therefore, with elevated um valuations in the US, I'm gonna assume you're expected

returns for the next decade is going to be below average. Yeah, oh, certainly, and we've we've had that for for over three years. Um. You know, actually this year is the first time that we did not maturely downgrade or expect a ten your your turnout look for a balanced portfolio. Further, right, So we've been getting more guarded every year as the markets have actually rewarded us on average. So a little bit more constructive outside the US over the next five or

ten years. Um, uh, the US. So I think smart investors, you know, even even a simple contrarian strategy of rebalancing UM is probably putting more money to work at the margin outside of the US and keeping money in the fixed income UM. You know, our our long drumbeat has almost been boring, quite frankly. Of there's there's greater risk in in the equity market than the bond market. That's why you would want there as a long term investor. But also let's be cautious of uh, of taking too

much risk in this market. Greater risk in the equity market than the blonde market today. So last question about valuation. There was a Wolf Street Journal article. I want to say a month or so ago, and maybe it was a couple of weeks ago that said, hey, that whole fourth quarter eighteen pullback of almost reset valuations to the point where there seemed to be sort of reasonable in the US exaggeration or or now, I mean they actually we're back into our fair value range first time in

over two years. So it's a general good thing. We were still looking from you to you know, a little bit more mute returns just because um, we have lower expected returns for the risk free rate, for the cash rate the Fed funds, and that hasn't changed. We've been you know, we've been on that mind for a long time. So uh but yeah, we're I do not you know,

we were not alarm us on the market. Um, I think you know, the investment of ourn going forward, we said for two years, barrier, it's it's gonna require diligence and patients. And I'm not a patient person because you have a low expected return, but you can't void to miss periods when when that risk premium is rewarding you. So you know, I think the temptation is going to be to what I call shiny new objects. Do you

got a how our return? You know, not to say that that's some you know it just gotta be careful here. I think you gotta just stay stick to the plan. If you're gonna take all more well, and if you're gonna take all more risks, do it eyes wide open. It doesn't mean one doesn't change one's plan. I just think that are my job at Vanguard and my team's job is just to help convey the risk and the trade offs other investors trying to make tough choices under uncertainty.

More more often than not, it's it's a good reason not to change when you when you understand where the risks are. Um. But that shouldn't mean that investors don't necessarily never you know, don't ever change. Just let's be let's be mindful of what the trade off we're making. So I know I only have you for a limited amount of time, and I wanted to get to my

favorite questions. Let's let's uh, and I know you get to listen to these when you're out running Saturday morning, so let me uh, let me jump right in this. Tell us the most important thing people don't know about Joe Davis. So the little personal thing is I grew up ten minutes from aguards building, which is which is astonishing, astonished thing. If I actually had an arm, if I could have actually played baseball professional, I could probably hit

my my parents house. The other thing is I was actually, to my understanding, I was one of the few, effect that perhaps the only non academic to have been led in the National Bureau of Economic Research, So you want to do. My dissertation was on economic history, not a very popular topic. It's kind of had a Renaissance history, not economic no, it's economics. But I did it. I I created an effectively of a pre GDP GDP measure going all the way back to the seventeen nineties. I

didn't know what I was getting into. If I had known how much work it was, very I would have never have done it. For the nineteenth century, an annual measure of business cycles and economic activity. And um I was you know. The the NBR urges at the time were very courteous uh to allow me to to to participate formally. Eventually they kicked me out because I'm I'm in the private sector. I think that's fair. But to this day I'm a I'm a fervent reader and participant

in economic history. Quite quite fascinating. Who were some of your early mentors. But the first one was before I came to Vanguard. So after my first year duke in the PhD program, I actually I left because I was unsure if I wanted to go into academia. And I worked for a company right in Westchester, Pennsylvania, again five minutes from where I grew up, So I don't I tend to stay close to home here Barry as a theme, uh. And I worked for now what's called um, you know,

Moody's economy doctor. So I'm worked with Mark Zandi, a great experience. Uh. I learned from Mark some of the things they you don't learn as an economist in grad school, the economic data, how to really right well for particularly a non academic audience, how to present to a too large audience with not being ton esoteric. Uh. So he was great mentor. I learned a lot. And Zandy, if memory serves, was chief economic advisor to Vice President Biden.

Is that I think he was. In fact, he's he's a he's now a close neighbor of mine, and actually I see him running sometimes on the weekend. So again I have high praise from another early mentor. Was Bob Outwood or at Vanguard? He took chances on me. He could have hired any economists. Now, I was the only economist of Vangar, so maybe he didn't have much choice. But Bob, Bob was the head of fixed income. He was tough, he was demanding. He was also fair, and

I learned a lot from him. And again I will always oh Bob and many others at Vanguard for taking chances on me. So let's talk about investors who influenced the way you look at the world of UH data and valuation and investment. I'll give you two, Um, I'll give you three. One is uh you know Jack Bogel clearly um Uh. I knew of his work and was educated myself before I came to Vanguard, but then I realized how much I did not know. Um. Secondly, was

even something I started reading in high school. Burt Malkiel Random Walked Down Wall Street was one of the first books around investments that I ever read. Marry now and it's like eleventh edition, I think I had. I had to read it twice because I didn't understand it all the first time. Um. And then more recently, you know, uh, individuals such as Cliff Assess uh at a q r UM. You know, I'm a fan of their research, and I think they do good work, and I think they treat

data with the humility and respected deserves. So you mentioned a couple of books earlier as well as Random down Wall Street. Tell us about some of your favorite books, be they finance or not, fiction or not. What what do you like and what are you reading? Well, you know some of the recent stuff that I was reading around the Idea multiplier, give you one, the Idea Factory, so fascinating study around Bell Labs, always going back to

the twenties, wonderful. I mean there's a great story if you even wonder where the freight or the word cell phone came from. Uh, and their stories of them trying the test radio cell towers and at nighttime in Philly driving around because they didn't know how to where to put the antenna. I mean, it's some great stories. I'm a great reader of I try to read a lot on on on political and economic history. So anything written by David McCulloch, you know, The Wright Brothers is his best. Uh.

It's fascinating book. Uh. In my in my judgment, I read a lot on Um. If you want to read a little bit more of an alarming UH study on between the tensions of the U. S and China, you can build Michael Pillsbury the hundred Year Marathon. Um. You know, I don't necessarily agree with all of it, but it's it's worth a read. Um. I Also, my wife and I love to cook, so I have some favorite cookbooks. We probably have add of them if you want. Really,

if you care about good barbecue. My friend at Vanguard, he turned me on to Franklin's Barbecue. So it's a barbecue, yeah, it is, it is. I I think I've underlined more in that book than I have my economics textbooks and grab school. If you want to know how to cook great brisket, um and barbecue, that's easy to just cook the hell out of it. You no, no, But I tell you this book it Frankly, they give you everything. It's it's a famous I believe they're in Austin, Texas.

So I've never been to the restaurant, but I've read their book. It's worth a read. You've been to Austin, I assume, yes, that's a great uh, a great food town. So when you say you and your wife left to cook, do you prepare meals together? Do you do a we'll split up. She does the hard stuff, which is the baking. She's very precise measuring. Despite all my analytical background, I find cooking therapeutic. I I only look in the ingredient lists. I never measure. I can never replicate anything I do.

That of course implies that actually tasted good. But uh, I find it. It's actually a good, a creative release, whether it's cutting vegetables or just spending time with the family. I think it's you know, my my big turning point was not worrying whether or not the dish turns out right. He was worried about making a mistake. That that's quite fascinating. We Sunday night, we have a shelf full of cookbooks. We pull a cookbook out and Sunday evening dinner is

always a new recipe. Sometimes it's delightful and sometimes not. But it's that process of just messing around. It's fantastic because I'm not a creative person, you know, and so I found that really you are. Your research is creating new ways of analyzing things like I'll take it as a comment. Economists don't always get the creative. That's fair. So tell us about what excites you now, what what changes are you looking forward to in the industry. Well,

you know, I'm you know, being part of Vanguard. It's a great company to be a part of. I'm proud of our culture. I'm excited about just all investors globally. I think, um, they're going to have a great opportunity for lower call the adoption of what I think is a high value technology, which is low cost portfolios. I think we're stole only on the third or four fourth

inning of this United States. What is it of total But again, if you I I look in the world, I look at the inverse of that, which is probably roughly fifty of investments. Perhaps there are stolen two high cost products, but you're saying is probably stolen too. And if you say a low cost, high value product actively managed, passively managed, perhaps rapid vice around that. Uh, that's the adoption of of a wonderful technology that I think if there's an s curve to it. In the US, we're

probably only in the third or fourth inning. In outside the United States, we're probably in the in the game. Just the first inning just started, So I'm I'm excited for investors regards to who who's firm we can bring those certain who brings them those services. But it's exciting time, I think to be an investor despite the low return environment, quite quite fascinating. So tell us about a time you failed and what you learned from the experience. Well too,

I mean I felt a lot. I always thought i'd play in the nfl U until I rose. I'm only five ft nine, so that that What did you play in high school in college? I played in high school. I was lucky enough to be on the team, so I learned a lot of failure Athletically, I tend to be a better student. Um so I learned humility early in life. But I tell you one time that's stuck with me and failed. I mean, I generally got very good grades, which is why you go to grad school.

I tried to stay in school as long as possible. With my first class down in Duke in the PhD program was for game theory, so leading uh teacher in in World game theory her Ay Mulan, And the first test I knew I didn't do well, but he writes on the board, what the average was it was a twelve. I got an eight. And now I was realized, this is not out of a hundred. It was out of a hundred. Really, I didn't realize it was out. I'm assumed maybe the wake up call. So what the lesson

was a failing? I can't first actually failing that class. First I realized two things. One is, I'm never going to be a micro economist. Secondly, you're not as smart, Joe as you think you are. And so I think, I like to think I'm a humble person, but every so often, as my mom says, it's it's good to eat a little humble pie. And so that was a great lesson to me, the need for hard work. It was also a testament that is, if you work hard enough,

you can learn a lot of things. And so to this day that that test is sear to my were on my brain of you know when those days happen, because they do happen, you can recover if you're willing to put in the hard work. What do you do for fun? What do you do when you're out of the office. Such time a time of my family, my wife, we've been together a long time, ever since college, when she accepted my offer for a first date. I'm a

lucky man two children who are growing up quickly. I have fifteen and thirteen year old who weren't born yet when I came to Vanguards. So uh um, yeah maybe, But I mean I try to. I try to read as much. I I'm a firm beliader believer in reading. I believe everyone should read. It's just my humble opinion. Least three hours a day, three hours, three hours I think. I try. I try to get up early to read.

I make up for lost time on the weekend. But if it's not spent with a family, you'll probably find me either reading history or the latest technology or or math. Uh to keep abreast of technology trends. I don't care as much of what I am reading as long as I feel like I'm being intellectually um challenge and remaining into actually curious. So you're still a runner, are you doing? Oh? Just I just try to stay you know, just try to stay fit. I realized in with every passing day

my metabolism is slower than the day before. So uh again. I also find I'm actually better at research and creativity the more I do work out, so I've gotten less into the heavyweights like TRX, kettlebells. Bill McNab obviously, you know, I know gentlemen of he turned me onto a lot of different exercise. He's he's great, so I'm I should ask him what's his next lady? You know exercise technique. I'd become intrigued by two exercises that are so different.

One is rowing, oh my son rose, and the other is boxing. Boxing. Yes, I have, I installed it. We got we last last Christmas boxing down in our basement of boxing bag. So speedbag or ahead no heavy bag. Yeah, it hurts, it hurts the risk when you first start, but it's worth It's a good I've been doing that in the winter because sometimes you can't run on the bekend with the ice. But yeah, it's like whatever you do, as long as you diversify a little bit, keeps up

the excitement. A question I should have asked you earlier, but I'm finding that there's some fascinating answers to this. What was the year making model of your first car? Oh Man, I was sixteen. My parents said, if you get good enough grades, you can actually drive to school, which was a big deal. It was a Chevy Cavalier White. It's probably a eight six, a piece of crap. But but two guys like you and I cars meant so I was actually I don't think I don't think it

means the same thing. Yeah, but you know my parents I give my parents, you know, they you know, I was actually lucky, unfortunate to have my own car. I'm sixteen, and that was nicer than my first well and my dead But when my daddy always said, in institute such a lesson. You have to pay for your own insurance and you have to pay for all the gas. So it's get a free rod. So we'll get a job. And uh and by the way, you have to keep up the grades while you do it, so that that's

quite interesting. So our final two questions. A millennial or recent college grad comes up to you and says they're interested in the career in finance. What sort of advice would you give them. I go back to that I said before read read read. I mean three hours a day, everything that did that's going on in the profession, and everything tangential to that practitioner, research books of the leading

authorities in the field. I mean creating new so in my field, investment research or even portfolio management, Barry, if we can stand in on the shoulders of what others have written, that's the and so if you can just have a good understanding what other smart people have commented about, that is the context that allows you to incrementally perhaps contribute to the debate. So read, read, read what I'd be doing on both the math side and the history.

I think the one mistake the economics profession made pre GFC is too much math, too little history. That makes perfect sense. And our final question, what is it that you know about the world of economics and investing today that you wish you knew thirty years ago? I underestimated the power of compounding. Really, I knew same was important my parents. My dad turned me onto Vanguard Investing with

my summer law mowing and construction money. But uh, I tell you this, I mean so, I tell you before I had really learned the benefits of Vanguard Investing, I'm down in grad school. I'm using I was using Amazon as early. If you remember ordering Amazon ninety five, you get a free coffee mug with a new book. I had to write them to say stopped sending me called mugs. I owned Amazon stock in and I sold it in

two thousand and one for like single digits. To this day, I refused to I refused to calculate what I've lost, but power of compounding sting invested into markets that was somehow since I've learned at Vanguard, Joe, thank you so much. This has been absolutely fascinating. We have been speaking with Joe Davis, chief economist and UH chief cook and bottle

washer over at the Vanguard Group. If you enjoy this conversation, well look up an intro Down an Inch on Apple iTunes and you can see any of our other two hundred and fifty or so such conversations that we've held over the previous five years. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Go over to iTunes, give us a five star review. If you enjoy this conversation, I would be remiss if I did not thank our craft team

who helps put this together each week. Medina Parwana is our producer and audio engineered. Taylor Riggs is our booker. Attica val Bron is our project manager. Michael Batnick is our head of research. I'm Barry Ridholts. You've been listening to Masters in Business from Bloomberg Radio