Transcript: Joe Davis, Vanguard’s Chief Economist



The transcript from this week’s MIB: Joe Davis, Vanguard’s Chief Economist, is below.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast, and Stitcher. Our earlier podcasts can all be found at iTunesStitcherOvercast, and Bloomberg.

This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest, his name is Joe Davis, he is the chief economist and global head of investment strategy at the giant $5 trillion Vanguard Group. If you are at all interested in a very nontraditional economic discussion, then you’re going to find this conversation fascinating. We talked about global trade, but not who’s selling what and what tariffs are in the way, 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 negative aspects of economic growth, and really helping to raise up the entire world economy and world standard of living.

This is a fascinating want the conversation that I think you’ll find absolutely intriguing.

So with no further ado, my conversation with the Vanguard Group’s 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 is also a member of the senior portfolio management team for Vanguards Fixed Income Group, Joe Davis welcome to Bloomberg.

JOE DAVIS, CHIEF ECONOMIST, VANGUARD GROUP: Thanks, Barry, throw the beer.

RITHOLTZ: 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, is that true?

DAVIS: I grew up literally 10 minutes from Vanguard’s building, I never thought I would end up working at Vanguard, like a lot of things in life, I have my parents to thank for why I’m actually at Vanguard. So I’m coming out a grad school, do my own job search, I’m 31 years old so of course I thought I knew everything.

RITHOLTZ: And you went to grad school…

DAVIS: At Duke…


RITHOLTZ: OK, that’s what I recall.

DAVIS: So I really wanted to go to the private sector not in academia and thought I was going up to New York City to work on the sell side and then my dad pulls me aside, and he says “Hey, have you ever thought about applying to Vanguard?” So of course, again, I’m 31, I say “What? Vanguard that index company? They don’t need an economist.”


And 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 Jack Bogle who was obviously, continues to be a luminary in the field and I was and so next you know, I’m interviewing at Vanguard it’s 2002 and I was, to this day I was impressed with the talent of the professionals I met at Vanguard with no egos.

And that’s over 15 years ago, Barry.

RITHOLTZ: 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 13 year-old daughter asked you the question, “Hey dad, is the world getting any better?” that’s kind of fascinating from a 13 year-old, but my question for you is what was your answer?

DAVIS: Well, you know, my instinct was it depends and that’s course that’s not, that’s not satisfactory, but the standard economic response, you know my daughter really got me thinking, I remember sitting in the kitchen table, Barry and I said myself you know I should know the answer to this question pretty quickly and I’m going to fail seventh grade, that was a question to a 7th grade essay.

That ended up becoming a hole on a research project because where I zeroed in on 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 accelerate and why anyone should care about that is because then the standard of living for people around the world is increasing and we — that rate of increase has been you know, declining since 2000, long before the global financial crisis.

And so we stumbled on what is going to lead to higher rates of growth, innovation for a more inclusive growth across the world and something we didn’t expect to 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 5 to 6 years in the future.

RITHOLTZ: So Steven Pinker, a linguist at Harvard wrote a book “The Better 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, infant mortality, lack of nutrition and starvation, capital crimes, war, all these things have been going down and going down 50 years on a global basis…


RITHOLTZ: 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?

DAVIS: And I remember writing off some of the statistics you know to my daughter, you know, Steve’s book, Hans Rosling for years….


DAVIS: Also talked about that, a great example, I think part of it is those are slow-moving trends so we just don’t fixate on them because they’re not moving up and down very quickly.

RITHOLTZ: Those are years and decades.

DAVIS: Yes, years and decades, the other thing is listen, I can’t prove this, Barry, I think part of this is happiness is relative in life, right?

RITHOLTZ: Relative to what?

DAVIS: Well it depends to relative to you know so it’s relative to your peers.

DAVIS: I think you can explain the paradox of so do you have general trends in the world a lot of trends are better, lower violence, increased wealth around the world, look what’s happened in China, yet you have rising income inequality. So that’s where you — I think you can reconcile some of this paradox by saying that’s where the relative matters as much is the absolute.

I don’t — that’s when I justify that position but I think that has been lost sight of but the fact is I think in the financial markets and as investors, we focus more on corporate earnings growth, those economic fundamentals perhaps may fall outside of GDP.

RITHOLTZ: So let’s talk about the productivity issue that you mentioned, so I work in a space where productivity has been exploding…


RITHOLTZ: And so on a relative basis…


RITHOLTZ: 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?

DAVIS: Yes, I think that there’s three potential reasons, again we should care because if productivity 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 90s, we haven’t seen a material pick up in productivity and again it feels all around us, Barry, right? I mean technological disruption, innovation, technology, it seems like it should be there.

So one, 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 were statistics have always been mismeasured.


DAVIS: And I’ve done a lot of economic historical work to justify that position. Secondly is that it’s were permanently — there are 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 heard of all ideas are harder to come by, that that productivity is permanently impaired, I don’t buy that either.

The third one is I believe that there is an implementation phase that the global economy is working through. Again demographics aside, I’m talking about output per person, income per person, that we will see a material rise in productivity. I can’t tell you the day or the week Barry, but our work, somewhat — we can get into, we call the ideal 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. But it’s going to take a little bit of time.

And again, there is an historical analogy to this, in the past two periods in the long US history over 200 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 that the mid-19th century when steam engines and locomotives were expanding across the economy…


DAVIS: But there was a 10 to 15 year period after financial crisis, ironically, when growth and productivity was at a standstill.

And yet investment in new technology was starting to pick up.

RITHOLTZ: So how much of an impact does the financial crisis have on either actual innovation or the measurement of innovation in the following decade?

DAVIS: WelI, I believe and in some of the work we’ve done shows that most industrial revolutions we can debate whether there’s been two, three, or four, they generally have two broad phases.

The first one is the first euphoria, that can last 10 or 20 years, that’s when the first technology, the general purpose technology, steam engine, electricity, the computer, when it’s built and is introduced to the marketplace, think of routers and hardware in the late 90s, that’s the first phase.

There typically then happens a period of euphoria with that, financial bubbles, there’s economic damage, what I think is lost though with the more powerful phase is 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 were on some call 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.

And so that’s where we will see the productivity gains is all the other occupations and industries across the country using that sort of computer technology.

RITHOLTZ: Quite fascinating. 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.


RITHOLTZ: Discuss that research.

DAVIS: Well, we we’re trying to answer the fundamental question, Barry, and again, we fully answered it but I think we have better insight into explaining this paradox in the world, low productivity and measured rates of innovation, we got technological disruption all around us.

And where our research led us is to say what ultimately leads to profound increases in economic growth, whether it’s in China, the US, it’s that genuine rate of innovation, right?

And what we did is we looked at say well, if productivity, whether it’s low or high, ultimately what that means is the amount or the number of valuable ideas being created in the world, ideas for a new widget, new computer, new business model, new product, that has to be depressed now and 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 at all will go accelerate.

RITHOLTZ: So let me try to unpack that a little bit because that’s a really loaded multipart observation. First my assumption has always been 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…


RITHOLTZ: Human ingenuity is constantly trying new things and putting different things together, but what you’re implying is new ideas ebb and flow…


RITHOLTZ: In a cycle of sorts, is that…


DAVIS: Yes, I mean…


RITHOLTZ: That’s a fascinating concept.


DAVIS: It’s a fascinating, there’s a long way, you can smooth any time periods and you can find this, but long rays of innovation to some effect in the United States we’ve had at least nine periods when productivity on a ten year basis has been zero.


DAVIS: Now, just because it’s been 0-9 previous times doesn’t mean we are going to rebound out of this one because that’s where we’re at in the previous 10 years.

RITHOLTZ: Zero, now when you see say zero productivity.

DAVIS: On a trailing basis right…


DAVIS: I’m talking the trend, forget the…

RITHOLTZ: So what happens is there’s a giant drop in productivity because of all the job losses.

DAVIS: An economist, myself included you know I need to — going back to my daughter’s question, I didn’t have a good answer because economists generally treat productivity as a residual.


DAVIS: Meaning we don’t really know what — why it goes up and down through time because ultimately it leads to where your new ideas are coming from, so 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 of the past four years. It was over 2 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 frankly, 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 under attack with trade, is the trade of ideas, right? The fact that there’s more knowledge and ideas being created in China which is actually now leading to do further additional ideas in the United States and vice versa. And so what we found is that that this will call the ideal multiplier, how many future ideas are created by one good idea?

In 1980, that ratio was roughly 40 to 1.

40 to One, it picked up in 1992, it actually told us had we had the data back in 1992 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 2 billion records you could see that sort of high-energy state in those fields and it’s been dormant for the past 10 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 200 ideas to one.

RITHOLTZ: And you are suggesting that this is cyclical and temporary and down the road…

DAVIS: Well, we just picked up, so the data and we were so I was shocked to find, in fact, we had the team crunch it four different times, a lot of that what we found is now and just in the past year, that idea multiplier went from 200 to 1 to over 400 to 1.

RITHOLTZ: So in other words this is now starting to tail off…


DAVIS: This is a leading indicator, this idea multiplier when you look at its rate of change tends to lead actual productivity growth for five years in the future, I know it sounds crazy but the ideas that we’re tracing in our leading indicator are ideas in academic research, medical research, its patent applications and how they are being cited.

Every journal and every book that has ever been written over the past 40 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 found now that have the higher idea multiplier than what the computer technology industry had in 1992.

RITHOLTZ: What are those five fields?

DAVIS: Those five are in order, one is around materials, it may have to do with batteries…


DAVIS: So I can’t…

RITHOLTZ: Batteries, nanotechnology..


DAVIS: Yes, I cannot tell you what game changing ideas will occur but I can we can have some sense where the field are.


RITHOLTZ: 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 building, it’s no longer steel, it’s a form of carbon graphite…

DAVIS: Carbon fiber, yes.

RITHOLTZ: That you can make lighter and smaller and stronger, you couldn’t have built that 30 years ago.

DAVIS: Yes, so I told my daughter the three lead — the so again to have a higher idea multiplier today than computers did in 1990…


RITHOLTZ: So material science is one.

DAVIS: Material science is one, is actually I will give you four, second is actually oncology, the front end of cancer…

RITHOLTZ: Incredible progress happen.

DAVIS: That’s encouraging, my personal family suffer from that…


RITHOLTZ: So we will beat cancer in our lifetime, is that…

DAVIS: That I don’t know.


RITHOLTZ: I’m putting words in your mouth.

DAVIS: I know, yes, yes, yes, I will not say that.


The third is actually around agriculture, plant sciences…

RITHOLTZ: Increasing yield, increasing productivity…

DAVIS: Again, I know I’m not good enough or smart enough to tell you exactly new product will come out but there’s something big in the pipeline…


RITHOLTZ: A few years ago Monsanto patented the ability to create rice that was salt water resistant, so if you’re parts of let’s call India and Pakistan and Malaysia where it’s a staple crop but there are frequent floodings which can destroy regular most crops are sensitive to salt, this is salt resistant…

DAVIS: It’s fascinating, and then the largest one has the by far the highest multiplier is genetics and genomics.


DAVIS: Yes, I mean it’s off the charts…


RITHOLTZ: Makes sense right?

DAVIS: It is off the chat, I mean it’s over 2x where computers where again, just relative comparison because what’s an ideal multiplier? Again, we are introducing a new concept to this debate, it is effectively, you know, that’s in genetics and ironically do you see how I did not mention AI in any the fields?

RITHOLTZ: You did not, that’s correct.

DAVIS: Because what is happening is AI is currently important, I will call it broadly, computer technology, digital technology, they are being used by all these industries, that’s a general purpose technology, the ultimate new game change and ideas will come out I believe from one of those if not more of those fields I just mentioned, but they perhaps could not have come up some of those answer applications without computer — probably, we probably couldn’t perhaps do this podcast without the computer…


DAVIS: And software technology that you have today.

RITHOLTZ: We could, it would just be two people having a cup of coffee, that’s what the technology allows us to do.

DAVIS: Yes. Right.

RITHOLTZ: So I have to ask you a question about one of those titles, global head of Vanguard Investment Strategy, what is this group, what does it do, why does Vanguard have a global head of investment strategy?

DAVIS: Thanks, Barry. Ultimately, thought leadership, so our job, the Investment Strategy Group’s job, it’s a group in existence roughly 15 years. It’s actually the group I was hired into, and our job is to help investors be successful and help them — provide them with perspective on the problems we are trying to solve.

So if it is what is “What does Vanguard think … ” and if the next word or phrase is “What’s our view on the long-term trends in the economy? What are reasonable expected returns?” that would be Investment Strategy Group.

It would be on what are viable retirement income and investor behavior concerns and issues, this would be that group, it would be what’s the role of an asset or subasset class, factors, commodity, what’s that role in the portfolio, we would help through research as well as computer analytics 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 but increasingly doing a Lenovo through computer development as well as speaking to clients and prospects on the road.

RITHOLTZ: 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 about two thirds of the assets are broadly indexed.

DAVIS: Yes, I’m going to tell you, when I first came to Vanguard, I will never forget the question was why does Vanguard need an economist? It’s still the question I get asked.

RITHOLTZ: So why does Vanguard need an economist?

DAVIS: I think ultimately because for two reasons, one is ultimately asset allocation which we all knows the most important decision any investor has to make, ultimately is a function of the expected returns in volatilities you assume for that portfolio. Now you can use long-run history but why should you do it, are things different?

Secondly so that’s important and so how do you think through forming the sort of viable return risk expectations and the job of our team is to help do that in a reasonable way and secondly is to convey the risks in the marketplace to help investors make decisions on their own certainty.

I’m very proud of our framework, we refused to release short-term point forecasts.


DAVIS: We have a mantra at Vanguard, we shall not produce point forecasts, we can produce forecasts, I think that is helpful if we show the range of distributions, our job is to 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.

RITHOLTZ: But that probabilistic approach is very different than so really the question isn’t why does Vanguard have an economist? The chief economist? Really the question is how is Vanguard’s chief economist different from the typical chief economist at most Wall Street firms because that’s really…


DAVIS: And I respect many of my colleagues.

You know, I read their research, I would say, you know, where we differ is in the shift of our horizon and where we focus on, so we spend, for example, I’d I tell my team we should not be spending much time trying to devein what the latest GDP number will be.


DAVIS: We care about it, we will give a high-level glance but we care more about investigating longer-term trends such as technology, globalization, demographics, debt, why we care about that, because that ultimately alter the trend for growth for short-term interest rates versus the building block for all expected returns and the risk premiums you and I hope the harvest over our investment horizon. So not to say those other exercise aren’t important but we focus much more 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 it, day-to-day, week to week, I think you know economies should not spend as much time as we do at times on those sort of short-term signals.

RITHOLTZ: So when you’re talking about trends, you’re not talking about quarters and years, you’re talking about decades, long secular trends…


RITHOLTZ: That are very…


DAVIS: Yes, to help, you know, to influence, it’s just an input to our portfolio management team on fixed-income side, obviously they are 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 a distributional setting I talked to you before, Barry, we’re trying to and this is just as hard, one problem is not easier solved than the others, we’re just trying to focus if we can nail the sort of trend and have better sense — I’ll give you an example, for 10 years we have not been concerned of a rapid increase in core inflation in the US or almost any other market. One of the reasons why is we looked at the role of technology and how that is depressing, we quantified, the role technology in digital computers is actually probably subtracting 50 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 10 — for the 10 year treasury.

Again, we will never have a crystal ball, our job is to say what are the risks and what are the factors helping to drive these longer-term trends and I’m proud of you know that’s where our marginal hour or marginal dollar is trying to get — glean a little more insight into those longer terms…


RITHOLTZ: So let’s stay with the long-term trend with inflation, deflationary forces such as manufacturing economies of scale coming out of places like China but also India and Turkey and Vietnam and elsewhere, but that’s offset from some of the longer-term trends on things like education and health care which have been way above average, how do you look at that trend and what does that do to the overall inflation picture and everything else associated with that.

DAVIS: Well, I think, two things, one thing that’s been and statistically, we could, I could show you, it’s irony, one of the reasons why inflation it’s although possible is unlikely to rise materially in you and I’s lifetime is because you and I and everyone else in the marketplace believes that it won’t. It’s — so economist generally talk about anchored inflation expectations, really it’s around…


DAVIS: Anchored inflation expectations, right, it’s the tips markets breaking inflation, central bankers will use well anchored inflation expectations, really what this matters is that we believe that the we believe in the Federal Reserve credibility and achieving roughly 2% and so inflation expectations matter which means it’s less likely to core inflation to go above it or below it and now you overlay that with the trends in technology and we have long believed that generating 2% inflation in a digital world is just tougher to do, is it possible? Clearly.

If you go to Argentina, very easy to get.

RITHOLTZ: Well, but that’s a very…

DAVIS: That’s because they have very poor inflation psychology.

And so Japan, if anything, they have yet, to break that negative or low inflation psychology, the Federal Reserve to their credit and I think Americans as a marketplace, we generally zeroed in on that 2%.

RITHOLTZ: So putting aside the hyperinflation of Venezuela, and the deflation in Japan and let’s talk about the challenge of reaching 2% in places like Europe and America, what does this tell us about wages going forward, we’ve had 30 years of fairly flat net of inflation, 30 years of flat real wage gains, what can workers expect going forward?

DAVIS: Well I think modest increases, which I think is a positive, you know, the two things I would say about wages, one is wage growth, let’s say the US example, we are where we should be because at the end the day wage growth should be roughly the rate of productivity which you and I spoke about today …

RITHOLTZ: Which is kind of low.

DAVIS: Which is kind of low. And inflation..

RITHOLTZ: Which is a little low…


DAVIS: Now I would say that I think wage growth will continue to modestly inch higher and what I think is a positive, and there is always the risk the central banks overreact, that will not lead to material rise in core inflation, the wages can go up, I think actually a lot in the marketplace associate if wages should pick up further, let’s say it go from 3% to 4%, all core inflation, the fence behind the curve that’s a mistake in our mind because we believe that inflation, not wages, inflation are anchored and so we believe the Fed won’t make necessarily that mistake and overtighten that, so that would be good news.

I think — you know, but I think we’re going to live in this, there are several paradoxes in the world, one is low growth full employment, secondly is tight labor markets yet low-inflation.

RITHOLTZ: Low growth full employment, tight labor market…

DAVIS: But low-inflation.

RITHOLTZ: But yet low inflation.

DAVIS: Yes, so I think we can get from 3 to 3 1/2% 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 have more sustained growth.

RITHOLTZ: So you’re describing a little bit of a Goldilocks scenario as much as…


DAVIS: Don’t put those words in my mouth.


RITHOLTZ: But let’s take that apart, because my pal Larry Kudlow 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 fed’s hand, how long can those set of inputs continue into the…


DAVIS: Well, I think unfortunately I think it may take a recession before we get some — where — you know, the pickup and automation, you know, and productivity that I think we start to pick up because again this is a signal that’s five years out believe or not.

Listen, I think we are going to have a period where you know, to this day, our guarded return outlook we had a for two or three years…



DAVIS: We have been the only firm. I mean we have been the only firm. Unfortunately, it may take a bear market to get us out of this low expected return orbit.


RITHOLTZ: …and evaluation.


DAVIS: Yes, it’s no pain no gain.

RITHOLTZ: We were talking about kind of 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?

DAVIS: I think they are about where they should be, you know, we’ve had a long-standing view, Barry, in part because how we diagnosed where inflation was going to go that the Federal Reserve would be hard-pressed to ever get above 3% and we’re not like super bearish on the economy, it was to sort of diagnose the other trends and we thought four rate hikes in 2018 was likely, I think that because of the bigger the labor market, we went into the year are expecting two rate hikes that we get them just below 3% in that range. We’ve actually backed off that given the volatility we’ve seen and so…


RITHOLTZ: In 2019 …


DAVIS: We were expecting two when we first published our report.

RITHOLTZ: And that would bring us up to where? Three?


DAVIS: Yes, we’re close, it breaks two, 2 3/4 right? So we’re still low by historical standards, but what matters is the real rate not the nominal.

I think there the bias shifts towards them cutting rates, not because they made a mistake per se but you know I think we’re still in a period of choppy performance, so it’s one since the forecast — our forecast sounds like soft landing, I tried to ban that phrase at Vanguard to my colleagues because they said even if even if the ultimate landing is soft, it’s — the airbags may drop in the plane.

Like it’s not going to feel…


DAVIS: it’s going to feel choppy this year, I think the economy globally will take a beating, China’s growing lower than they report and the lower than expected and we’re going to have some choppiness here in the US.

RITHOLTZ: So they were a 12%, they fall into about a 6%.

DAVIS: Well, our leading indicators for two years real feel is closer to five.


RITHOLTZ: Which by the way, we’d be thrilled with 5% in the United States. Yes, I mean..


DAVIS: 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, they will stimulate a little bit but the trend is down, part of that is good news but I think that that the trade uncertainties really damaged I think consumer confidence in China.


DAVIS: So this slowdown is different from past China slowdowns in that the consumer is more at the epicenter of the slow down. I 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 set up for some weakness, this nagging concern of recession I don’t think will dissipate entirely this year.

RITHOLTZ: 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 push back to globalization. I want to I want to pull a paragraph out from something you had written previously “15th century China had been open to trade and it was at the 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 500 year decline in China’s innovation” explain.

DAVIS: Well, I think you know China’s history of really glorious history I think is a testament to the power of globalization, the openness to other ideas as well as the risks that societies face should they close their minds and their walls 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 born in China but I visit there and what you do read at the same time is the West you know does not escape from criticism and how we contributed or shape some China policies in the 18th and 19th century. It goes back to the opium wars and in the British.

So I think you know you the more you read China history, the more you read two things, one is you know their will as well as their belief to rise back to where they were at the leading economy of the world…

RITHOLTZ: Great power.

DAVIS: They’re a great power, you know, there’s a line from Confucius, a great quote, “there shall not be two stars in the sky nor two emperors on earth” it can be a little unnerving in today’s environment between the US and China, I don’t think it has to be as adversarial as some fear but I think you know the tensions that we see, economic, technology, military wise between US and China, I think that’s going to be with us for some time.

China has a roughly 15 to 20 year window to escape with whatever one calls the middle-income trap, right? To get wealthier middle average per household income, they’ve Steve astounded the world in their progress, mankind has never seen in recorded history the amount and the rapidity of economic development but they’re not out of the woods. I mean I think it has been risky to discount China but they have some challenges to work through, the demographic challenges that they face over of the next 30 or 40 years is the biggest one.

RITHOLTZ: Well that single child policy is turned out to …

DAVIS: Well, their population is going to drop 40% just think about that, 40% over this century.

RITHOLTZ: Those are the unintended consequences of that sort of social engineering, number one but still given how rapidly quasi-centrally planned economy has grown, is there any reason to think they can’t become the dominant economic power? They happen to be the…


RITHOLTZ: Stock market in the world…

DAVIS: Yes, I mean and now, I think here’s the thing, I’d love how you just mentioned that, Barry, because you’ve hit on this for a long time, and so I’m going to say this as an economist, 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 depth of 2009, 2010, let me show you a nice handy-dandy chart that shows this that the relationship between long-run economic growth of a country and a stock returns.

RITHOLTZ: Hardly correlated.

DAVIS: Yes, there’s a zero correlation, it looks like a shotgun on the page, which as an economist you cannot — kind of like talking yourself out of a job. I mean that is important because it’s like rather more than expected growth, it is the price paid for growth, it’s evaluation that’s why I would say…

RITHOLTZ: Market value matters.

DAVIS: The UK, China matters that’s why you know even as the economic performance has been languished at times in the US, we were very optimistic on US investment returns, you can see our first Outlook in 2009 2010, somewhat — we said we thought would be above average historical returns, if anything we were too low in our distribution…


DAVIS: We got above the mean, now is the economy has come closer to full employment, every year we’ve gotten more conservative and guarded in our investment returns is because the valuation you pointed.

RITHOLTZ: So good rule of thumb, markets get cut in half, not the worst time in the world to buy equities.

DAVIS: It’s not.

RITHOLTZ: So let’s circle back to the financial crisis that you mentioned, are we still feeling the effects of the crisis today more than 10 years later?

DAVIS: I think we are globally I mean that sort of tight grip continues to recede I think you see it even from some investors waiting for the next shoe to drop…


RITHOLTZ: The risk aversion.


DAVIS: The risk aversion, savings, I mean similar to the US and probably needed, I think we got a little bit better balanced, we have clearly seen it in the regulatory front across various markets over the past several years. You know, with every passing day though, it kind of proceeds in the rearview mirror so we’re not fully out of the woods but we have come a long way.

RITHOLTZ: So the low growth that we’ve been talking about, the low productivity soft GDP, again is that a hangover effect of the crisis or is there something else there?


DAVIS: Well, it was part, I mean we over consumed as you know many of your past guests have illuminated but again, it’s that’s where we focus on the trend, the trend was starting to bend in 2001 2002, which is why we come back to productivity.

And I would hope that your listeners, I do not wish your intend to be portrayed as a techno optimist, I mean I think there are reasons to be optimistic, but productivity will pick up, that I have high conviction in over the next several years and it’s an environment of potentially higher growth that no one is anticipating the same way in the mid-90s no one was anticipating the late 90s, but that does not mean there is not going to be headwinds and challenges. That the need for job training as an example on automation and if we are right in the pickup on automation is significant even if we do not have widespread job losses.

I mean there could be a very well 10 years from now, companies on average maybe spending more for job retraining then he will be on IT, so that you know that’s a sort of thing I just you and I said again it’s there’s cautious optimism in counsel to my daughter but it’s not Pollyannaish, I mean there’s challenges we all face and the technology can cut both ways.

RITHOLTZ: So let’s stay with the concept of the advantages of the exchange of ideas and 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 Paris Accord, there are a number of other policies and trade pacts and even the UK and Brexit…


RITHOLTZ: Are we moving away from globalization.

DAVIS: Well, it’s certainly stalled, if you define globalization traditionally which is fair of by trade, 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 around 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 so you can infer knowledge, but I think we have stalled 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 that more of it has been driven by technology than by potentially unfair trade practices.

So what that means is if the pace of technical technological change is not slowing, that means unfortunately the rate of — that that the level of income inequality may remain high and so these on what some call populistic — populism tensions in the world may remain elevated.

That I told us two years ago that like any at any election where in a country where income the quality has risen significantly, I would city election is going to be closer than anticipated, can be shocked at the outcome, I’m not a political handicapper but it says that we should expect surprises because I think there is again back to this happiness can be relative, the rise of income inequality on the low growth environment 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 not to lose sight of.

RITHOLTZ: So rising income inequality give gives rise to increase in populism.

DAVIS: It can, it can.

RITHOLTZ: Which gives rise to closer elections and does that mean political parties carry less sway and people vote …

DAVIS: 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 polarized you know, it’s I think it’s natural and sexy healthy environment when we’re debating, but if we’re debating and listening you know where I hope — where I worry about is when in any society, forget politics, any society that we’re not listening to each other, and so we’re talking beyond each other.

RITHOLTZ: 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 of Vanguard where he is chief economist and wears a number of other hats.

If you enjoyed this conversation, well, be sure and come back for the podcast extras where 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. Write to us at You can follow me on Twitter $Ritholtz our check out my daily column at

I’m Barry Ritholtz, 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. 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 the idea multiplier and the long-term trend of global exchange of ideas so I knew this was good to be a very interesting conversation.

Some of the questions I didn’t get to where the traditional boring economic question is on this get most of those in and just ask you a couple of short economic questions and I’m kind of…

DAVIS: I will keep the responses short.

RITHOLTZ: Well you go on — you can answer them in as much depth as you like but there I’m not asking you what 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 overemphasize some and underemphasize others, what do you think are the three most important things that we should be looking at?

DAVIS: I agree with you, Barry, I generally believe this and we do this, we look at all of them.


DAVIS: So we — so for a long time as I’ve been a Vanguard we use big data techniques to say — every signal, every economic statistic, jobless claims, nonfarm payroll, manufacturing, they all have some signal in it and noise think of any stock…


DAVIS: I don’t think you may necessary look at one stock is a house of broad market doing? So we rely — we look at all them and say what is — and extract from that what is that the momentum in the common signal across a broad economy…


DAVIS: Because every indicator goes through fits and starts the same being very valuable and then not being valuable.


DAVIS: So I’d say did that’s — the answer to your question is we look at all of them.


DAVIS: And then extract from that what are the common two or three signals so you could say this is the trend and the momentum in the economy rather than a pick any one signal?

RITHOLTZ: So the flip side of the question is what you think is the most overhyped economic indicator?


DAVIS: Well, I think GDP.


RITHOLTZ: We put too much emphasis on that.

DAVIS: I think we do, I mean I think there’s a lot of accounting regulars — you know, GDP can accelerate for a time just because businesses are our have slowed their growth and inventories are building…


RITHOLTZ: … looks like GDP…


DAVIS: There’s a little bit of bean counting to it, again, it’s valuable to have …


DAVIS: Came out of even war planning, you know decades ago …

RITHOLTZ: World War 1, World War 2,…


DAVIS: Yes, yes, decades, actually government officials did not know what the economy was producing and so to track that, so a great development but has its limitations. I mean if I was going to focus on one, at the day of the day, it’s job growth, you and I are running the business, to add a new worker, to let a worker go, that’s a significant investment, 60% 70% of corporate American cost structure so job growth is probably the most meaningful.

RITHOLTZ: 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 10 year, how do you look at the yield curve and is it…

DAVIS: Again, at Vanguard and they are just — we got statistics on our back — at our back saying listen, I believe there’s a portfolio of indicators you should look at whether trying to devein the future returns of the stock market, probability of recession, odds of a bear market, but that said if I we can pick one indicator to say are we going into recession or not, it is the yield curve.


DAVIS: And it is the traditional what I would call the academic one…


DAVIS: No, tens and three months…


DAVIS: That’s the most accurate, it’s the most genuine, I know some said hey, a zero interest rate environment or low interest rate environment, it’s distorted, I don’t buy it, If you and I, if we are going into a deep downturn, I imagine the 10 year treasury could be a 1%…


DAVIS: The yield 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.

RITHOLTZ: Now what we’ve seen when at least with the two in the 10 is it can give you a lead-time of about a year if memory serves, the three months and the 10 year was similar or …


DAVIS: It’s actually a little bit farther out.


DAVIS: Because the market’s forward-looking and at least fast-forward to 50 years not to the blame the Fed but the Fed has generally been in overly restrictive territory to temp down inflation, right?

So the twos have been elevated above the 10s, I mean excuse me, above cash, you know a year out anticipating further Fed tightening, at that point perhaps the market’s price and “fed mistake” are overly restrictive, that’s power of the yield curve. It’s uninfallible 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 to hang your hat on.

RITHOLTZ: So 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 70s, when inflation had spiked dramatically, the oil –the Arab oil embargo plus the malaise of Vietnam and Watergate, then Fed Chief Paul Volcker spiked rates to pick a number 15%, it broke the back of inflation and then we were looking at a 30 plus year…


RITHOLTZ: Bull market in bonds as rates gradually fell from there, how do you — since you look at trend in momentum, how do you contextualize those two? It appears that that trendline has been broken.


RITHOLTZ: And the momentum is now moving in a different direction, what does that tell us about bonds and the state of the world?

DAVIS: Well, I think, actually the pattern of bond yields so I know we can including Vanguard’s founder, Jack Bogle, rest in peace, long believer in mean reversion right why I’m bringing this up as I think mean reversion is clearly the most powerful force in finance, it is also the most dangerous and I use interest rate as an example because eve at Vanguard, we’ve had some clients and understandably concerned of a rapid rise in interest rates…


DAVIS: And bond yields because they lived through the …


RITHOLTZ: Well, from a very low.


DAVIS: From a very low, yes but the concerns of a bond bear market and you know our analysis said that although possible, extremely unlikely, and that just because interest rates are low today doesn’t mean they had to revert to some average…


DAVIS: My question is what the danger in 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 Shiller Cape ratio, nothing wrong with the sickle adjusted PE ratio or the level of interest rates, but what is normal that’s conditional on what are the forces that drive those factors.

So in interest rates for example, I believe that a fair value and we are fair value for long-term interest rates hasn’t changed in the US, it’s roughly 3% .


DAVIS: So even though that’s below where the 70s and 80s average was. Inflation was higher then. So I would tell investors if you worry about or believe that interest rates are going to rise materially, long-term interest rates, mortgage rates, ten-year treasury rates, you have to believe that inflation is fundamentally going to accelerate on a trend basis.

RITHOLTZ: So let’s talk about the Cape, you brought it up, going back to the early 1990s, the Cape has spent I think it’s something like 93% of 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 to …


DAVIS: Yes, so the valuation, great, I mean the Cape going back to Bob Schiller, Yale and others, that measure is informative for the whether the stock market is fairly valued, our issue is with investors comparing it to the long-run average they just draw a line across a piece of paper — the Cape, sometimes below and your point, Barry, it’s been generally above the past 20 years.

While what is actually important is is that you actually have to for what the ways the fair value that the market should the gravitational pull issue go to? It should always go to the same average.


DAVIS: And so our analysis and we had academic research published last year that show that you can actually significantly improve your likelihood of projecting five and 10 year out returns significantly if you control for the level of interest rates, real interest rates in the economy.

RITHOLTZ: In other words, when you have really low interest rates, you should have higher…


DAVIS: And low inflation, you should have higher PEs all else equal, it’s called the fair value.

It’s just like sometimes full employment is at four, sometimes it’s at 5%.


DAVIS: Sometimes fair value for the US dollar is high or low, 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 if economic conditions and trend conditions warrant it.

Which is why only in the past year did we become more guarded in the stock market so despite low growth environment and low interest rates, our indicators were saying that that the US stock market was clearly undervalued in 2009 2010 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 US stocks that remained pretty constructive up until more recently and only recently did this US stock market and 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 10 years.


DAVIS: So these are mean reversion, yes, but I think we just had to be careful what mean we are reverting, its interest rates or valuations.

RITHOLTZ: So therefore with elevated valuations in the US, I’m going to assume your expected returns for the next decade is going to be below average.

DAVIS: Yes, certainly and we’ve had that for over three years, actually this year is the first time that we did not materially downgrade our expected 10 year return outlook for a balanced portfolio further.

Right? So we been getting more guarded every year as the markets have actually rewarded us on average. So a little more constructive outside the US over the next five or 10 years, the US, so I think smart investors, even a simple contrarian strategy rebalancing was probably putting more money to work at the margin outside of the US and keeping money in the fixed income, our long drumbeat has almost been boring quite frankly of there’s greater risk in the equity market than the bond market that why you would want there as a lot of investor but also let’s be cautious of taking too much risk in this market.

RITHOLTZ: Greater risk in the equity market and the bond market today.

So last question about valuation, there was a Wall Street Journal article I want to say a month or so ago, maybe it was a couple weeks ago that said hey that whole fourth quarter 2018 pullback of almost 20% reset valuations to the point where there seems to be sort of reasonable in the US.


RITHOLTZ: Exaggeration or?

DAVIS: No, I mean they actually were back into our fair value range first time and in over two years, that’s a general good thing we were still looking for muted you know — little more muted returns just because we’ve lower expected returns for the risk-free rate, for the cash rate, the fed fund rate.


DAVIS: And that hasn’t changed, we’ve been — we’ve been of that mind for a long time so yes, I do not, we were not alarmist on the market, I think the investment environment going forward we said for two years Barry, it’s going to require diligence and patience and I’m not a patient person. Because you have a low expected return but you can avoid to miss periods 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 get a higher return, not to say that that some you know you just got to be careful here, I think you got to just stay — stick to the plan if you are going to take on more…

RITHOLTZ: Stay the course.

DAVIS: Right, and if you are going to take on more risk, just do it eyes wide open, and doesn’t mean one doesn’t change one’s plan, I just think that my job at vanguard and my team’s job is just to help convey the risk and the trade-offs of investors trying to make tough choices under uncertainty. More often than not, it’s a good reason not to change when you understand where the risks are, but that shouldn’t mean that investors don’t necessarily never you don’t ever change, just let’s be mindful of what the trade off we are making.

RITHOLTZ: So I know I only have you for a limited amount of time and I wanted to get to my favorite questions. Let’s — and I know you get to listen to these when you’re out running on Saturday morning…


RITHOLTZ: So let me let me jump right in this, tell us the most important thing people don’t know about Joe Davis.

DAVIS: So the little personal thing is I grew up 10 minutes from Vanguard’s building…

RITHOLTZ: Which is astonishing.

DAVIS: Astonishing, if I actually had an arm, if I could have actually played baseball professionally, I could probably hit my parents’ house, the other thing is that I was actually — to my understanding, I was one of the few perhaps the only nonacademic to have been led in the National Bureau of Economic Research, so my dissertation was on economic history, not a very popular topic it’s kind had a Renaissance…

RITHOLTZ: So your PhD is history and not economics?


DAVIS: No, it’s economics, but I did — I created an effectively a pre-GDP GDP measure going all the way back to the 1790s, I didn’t know what I was getting into, if I had known how much work it was, Barry, I would have never done it for the 19th century, an annual measure of business cycles in economic activity and I was — the MBR researchers at the time were very courteous to allow me to participate formally.

Eventually they kicked me out because I’m in the private sector and I think that’s fair but to this day I’m a I’m a fervent reader and participant in economic history.

RITHOLTZ: Quite fascinating. Who are some of your early mentors?

DAVIS: The first was before I came to Vanguard, so after my first year at Duke in the PhD program, I actually I left because I was unsure if I wanted to go in 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 and I worked for now it’s called your Moody’s Economy dot com/


DAVIS: So I worked with some work with Mark Zandi, great experience, I learned from Mark some of the things that you don’t learn as an economist in grad school, the economic data, how to really write well for a particular nonacademic audience, how to present to a large audience with not being too esoteric, so he was a great mentor, I learned a lot.

RITHOLTZ: And Zandi if memory serves was the chief economic advisor to Vice President Biden, is that right?

DAVIS: I think he was, in fact he is now a close neighbor of mine and actually I see him running sometimes on the weekend, so again I have high praise for Mark.

Another early mentor was Bob Auwaerter at Vanguard, he took chances on me, he could have hired any economist, now I was the only economist at Vanguard so maybe he didn’t have much choice…


DAVIS: But 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 owe Bob and as many others at Vanguard for taking chances on me.

RITHOLTZ: So let’s talk about investors, who influenced the way you look at the world of data and valuation and investing?

DAVIS: I will give you two, I will give you three.

One is Jack Bogle clearly, I knew of his work and was educated myself before I came into Vanguard but then I realized how much I did not know. Secondly was even something that I started reading in high school, Burt Malkiel …


DAVIS: “Random Walk Down Wall Street” was one of the first books around investments that I ever read, Barry.

RITHOLTZ: Now in it’s like 11th edition or something.

DAVIS: I think I had to read it twice because I didn’t understand all the first time and then more recently you know individual such as Cliff Asness at AQR, I’m a fan of the research and I think …

RITHOLTZ: They do good work.

DAVIS: And I think they treat data with the humility and respect it deserves.

RITHOLTZ: So you mentioned a couple of books earlier as well as “Random Walk Down Wall Street” tell us about some of your favorite books be they finance or not, fiction or not, what do you like and what are you reading?

DAVIS: You know, some of the recent stuff that I was reading around the idea multiplier, I give you one “The Idea Factory.”


DAVIS: Jon Gertner, so fascinating study around Bell Labs all the way going back to the 20s…

RITHOLTZ: Pre-Lucent days.

DAVIS: Wonderful, and there’s a great story if you even wonder where the fray or the word cell phone came from and their stories of them trying to test radio cell towers at nighttime in Philly driving around because they didn’t know how to — where to put the antenna, I mean there are some great stories.

I’m a great reader of I try to read a lot on political and economic history, so anything written by David McCulloch…


DAVIS: “The Wright Brothers” is his best, it’s a fascinating book in my judgment I read a lot on if you want to read a little bit more of an alarming study on between the tensions of the US and China, you can bill Michael Pillsbury “The Hundred Year Marathon” I don’t necessarily agree with all that but it’s worth a read. And also of my wife and I love to cook so I’ve some favorite cookbooks we probably have over a hundred of them.

RITHOLTZ: Do tell. Really?

DAVIS: If you care about good barbecue my friend at Vanguard, he turned me on to “Franklins Barbecue” so it’s a barbecue…

RITHOLTZ: “Franklin’s Barbecue”, I love barbecue.

DAVIS: Yes, it is — I think I’ve underlined more in that book than I have my economics textbooks in grad school if you want to know how to cook great brisket and barbecue, smoke…

RITHOLTZ: That’s easy, you just cook the hell out of it.

DAVIS: No, no, but I would tell you, this book “Franklin” they give you everything it’s a famous I believe they are in Austin, Texas so I’ve never been to the restaurant but I’ve read their book it’s worth a read.

RITHOLTZ: You’ve been to Austin, I assume?


RITHOLTZ: That’s a great food town.

DAVIS: Yes, it is.

RITHOLTZ: So when you say you and your wife love to cook, do you prepare meals together, do you do a…

DAVIS: We will split up, she does the hard stuff, which is the baking she is very precise measuring…


DAVIS: Despite all my analytical background, I find cooking therapeutic, I only look in the ingredient list, I never measure so I can never replicate anything I do, that of course implies it actually tasted good, but I find it is actually a good creative release whether it’s cutting vegetables or just spending time with the family.

I think you know, my big turning point was not worrying whether or not the dish turns out right, because I was always worried about making a mistake.

RITHOLTZ: That’s quite fascinating, Sunday night we have a shelf full of cookbooks, t 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 the kitchen…


DAVIS: Isn’t it fun?

RITHOLTZ: It’s fantastic …

DAVIS: Because I’m not a creative person and so I found that really…

RITHOLTZ: You are, your research is creating new ways of analyzing things like …

DAVIS: Well, I will take it as a complement, economist don’t always get the creative…


RITHOLTZ: That’s fair. So tell us about what excites you now, what changes are you looking forward to in the industry?

DAVIS: Well, you know, being part of Vanguard it’s a great company be a part of them proud of our culture I’m excited about just all investors globally, I think they’re going to have a great opportunity for lower — the adoption of what I think is a high-value technology which is low cost portfolios, I think were still only on the third or fourth inning of this United States …

RITHOLTZ: What is it, 15% of total assets?

DAVIS: Yes, but again o I look in the world — I look at the inverse of that which is probably roughly 50% of investments perhaps are still too high cost products.



RITHOLTZ: I’m saying 15 is the index…

DAVIS: No, I know but I’m saying…

RITHOLTZ: But you are saying 50 is overpriced.

DAVIS: 50 percent is probably still, if you say a little cost high-value product actively managed, passively managed, perhaps a rapid voice around that, that’s the adoption of a wonderful technology that I think if there’s an S curve to it and the US, we’re probably only in the third or fourth inning in the outside United States, we are probably in the — and the game, just the first inning just started, so I’m excited for investors, regardless of who’s we can bring those — who brings them those services, but it’s exciting time I think to be an investor despite the low return apartment.

RITHOLTZ: Quite fascinating. So tell us about a time you failed and what you learned from the experience?

DAVIS: Well, I failed a lot, I always thought I’d play in the NFL until I realized I’m only 5 foot nine so that…


RITHOLTZ: Well, did you play in high school and college?

DAVIS: I played in high school, I was lucky enough to be on the team I so I learned a lot of failure athletically I tend to be a better student, so I learned humility early in life but I tell you one time that stuck with me, I generally got very good grades which is why you go to grad school, I try to stay in school as long as possible.

RITHOLTZ: I’m with you.

DAVIS: My first class you can the PhD program was for game theory so leading teacher in world game theory, Harvey Milan (ph) and the first test, I knew I didn’t do well, but he writes on the board what the average was, it was a 12, I got an eight, and I was…


RITHOLTZ: This is not out of a hundred.

DAVIS: It was out of a hundred.


DAVIS: I didn’t realize it was out of 100, I’m assuming maybe 30…


DAVIS: It’s a wake-up call to what the lesson was a failing — I came close to actually failing that class first to I realized two things, one is I’m never going to be a micro economist…


DAVIS: Secondly, you are not a Smart Joe as you think you are and so I think I just like to think I’m a humble person but every so often as my mom says it’s good to eat a little humble pie and so that was a great lesson to me the need for hard work, it is also a testament that is if you work hard enough you can learn a lot of things.

And so to this day that test I seared to 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.

RITHOLTZ: What do you do for fun? What do you do when you’re out of the office…

DAVIS: Time with my family, my wife we’ve been together a long time ever since college when she accepted my offer for a first date and I’m a lucky man, two children who are growing up quickly, I have a 15 and 13 year-old who weren’t born yet when I came to Vanguard so …

RITHOLTZ: Right, Vanguard babies, is that a thing?

DAVIS: Yes, yes, maybe but I try to read as much, I am a firm believer in reading, I believe everyone should read, this is just my humble opinion, at least three hours a day.

RITHOLTZ: Three hours a day of reading…


RITHOLTZ: You and Warren Buffet and Charlie Munger.

DAVIS: 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 will probably find me either reading history or the latest technology or math to keep abreast of technology trends.

I don’t care as much of what I’m reading as long as I feel like I’m being intellectually challenged and remain intellectually curious.

RITHOLTZ: You’re still a runner, you do …


DAVIS: I just try to stay fit, realizing with every passing day my metabolism is slower…


DAVIS: Than the day before so was again I also find I’m actually better at research and creativity the more I do work out, so I I’ve gotten less into the heavyweights like TRX kettle bells…


DAVIS: Bill McNabb, obviously…

RITHOLTZ: Yes, I know Bill.


DAVIS: He turned me on to a lot of different exercises, he’s great so I should ask him what’s is the next latest you know exercise technique.

RITHOLTZ: I’ve become intrigued by two exercises that are so different, one is rowing…

DAVIS: My son rows.

RITHOLTZ: And the other is boxing.

DAVIS: Boxing, yes, I have — we got last Christmas a boxing down in our basement, a boxing bag, so …

RITHOLTZ: Speed bag or a heavy?

DAVIS: No, heavy bag.


DAVIS: It hurts the wrist when you first start but it is a good — I’ve been doing that in the winter because sometimes you can’t run on the weekend with the ice, but yeah I think whatever you do as long as you diversify little bit keeps up the excitement.

RITHOLTZ: A question I should’ve asked you earlier but I I’m finding that there’s some fastening answers to this, what was the year, make and model of your first car?

DAVIS: Man, I was 16, my parents said that if you get good enough grades you can actually drive to school, which was a big deal…


DAVIS: It was a Chevy Cavalier white, it’s probably a 86 85…


RITHOLTZ: That is a piece of crap, but to guys like you and I, cars meant freedom.


RITHOLTZ: I don’t think it means the same thing to kids today.

DAVIS: Yes, but you know, my parents, again, my parents, you know, I was lucky, even fortunate to have my own car when I was 16.

RITHOLTZ: And that was nicer than my first car.

DAVIS: Well, but what my daddy always said, you have to pay for your own insurance, and you have to pay for all the gas.

So it’s not a free ride, so go get a job, and by the way, you got to keep up the grades while you do it.

RITHOLTZ: So that’s quite interesting.

So our final two questions. A millennial or recent college grad comes up to you and says they are interested in a career I finance, what sort of advice would you give them?

DAVIS: I would go back to what I said before, read, read, read. I mean three hours a day, everything that is going on in the profession and everything tangential to that, practitioner research, books of the leading authorities in the field, I mean creating a new sort of — my — I go to investment research or even portfolio management, Barry, if we can stand on the shoulders of what others have written, that’s like 90% of the task.


DAVIS: And so you can just have a good understanding what other smart people have commented about, that is the context and allows you to incrementally perhaps contribute to the debate. So read, read, read what I would 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.

RITHOLTZ: 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 25 30 years ago.

DAVIS: I underestimated the power of compounding.


DAVIS: I knew savings was important my parents my dad turning on to Vanguard investing with my summer lawnmowing and construction money, but I tell you this, so I tell you before I had really learned the benefits of Vanguard ingesting,1997 98 and I’m down in grad school, I was using Amazon as early as ’95, if you remember ordering in Amazon in ’95 you get a free coffee mug with a new book, I had to write them to say stop sending me coffee mugs, I owned Amazon stock in 97 and I sold it in like 2001.

RITHOLTZ: For like single digits. Eight bucks?

DAVIS: And to this day, I refuse to calculate what I’ve lost, the power of compounding of staying invested in the markets that was some — since I’ve learned at Vanguard.

RITHOLTZ: Joe, thank you so much, this has been absolutely fascinating.

We have been speaking with Joe Davis chief economist and the chief cook and bottle washer over at the Vanguard Group, if you enjoy this conversation, well look up an inch or down an inch on Apple iTunes and you can see any of our other 250 or so such conversations that we’ve held over the previous five years.

We love your comments feedback and suggestions, write to us at, 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 crack team who helps put this together each week, Madena Parwana is our producer and audio engineer, Taylor Riggs is our booker, Atika Valbrun is our project manager, Michael Batnick is our head of research.

I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.



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